What is a ROU (right-of-use) asset?
A right-of-use asset, or ROU asset, represents a lessee’s authority to utilize a leased item, typically property or equipment, over the duration of an agreed-upon lease term. In other words, the lessee is granted the right to obtain the economic benefit from the usage of an asset owned by another entity
How to view ROU Asset in LeaseGuru
LeaseGuru automatically calculates the right of use asset for you when you enter a lease. You can view this in the journal entry after your transition date.
Right-of-use asset under ASC 842
ASC 842 differs from the other lease accounting standards as a result of retaining its dual-model approach to presenting lease assets and lease liabilities on the balance sheet and income statement. That is, ASC 842 continues to distinguish between operating leases and finance leases with each classification requiring a capitalized ROU asset.
However, accounting for finance leases, previously referred to as capital leases, under ASC 842 is largely unchanged compared to ASC 840. Under the old standard, lessees were required to record an asset and liability for capital leases. The same is true under ASC 842.
How to calculate the right-of-use asset under ASC 842
Under ASC 842, initial operating and finance lease ROU assets are calculated using the exact same method. The steps are as follows:
Start with the initial amount of the lease liability, computed by discounting the remaining lease payments
- + Outstanding balance of prepaid rent or
- – Cumulative remaining deferred rent
- + Initial direct costs
- – Lease incentives paid at or before commencement of the lease
It is important to note that for basic leases, the ROU asset and lease liability will be equal upon lease commencement. For example, if a company has a lease without initial direct costs, prepaid/deferred rent, or a tenant improvement allowance (or some other lease incentive), then the ROU asset and the lease liability will be equal on the lease commencement date.
Right-of-use asset under IFRS 16
A classification distinction between operating and finance leases does not exist under IFRS 16. Rather, a single model approach is applied whereby all lessee leases post-adoption are reported as finance leases. These leases are capitalized and presented on the balance sheet as both assets and liabilities, unless subject to any of the exemptions prescribed by the standard. IFRS 16 also refers to the lease asset as a ROU asset.
How to calculate the right-of-use asset under IFRS 16
IFRS 16 directs lessees to calculate the ROU asset as the following:
- The initial amount of the lease liability
- + Payments made at or before the commencement date of the lease
- – Lease incentives
- + Initial direct costs
- + Estimated costs for restoration or removal/disposal per IAS 37Provisions, Contingent Liabilities, and Contingent Assets
Right-of-use/lease asset amortization
Under ASC 842 for operating leases, the ROU asset is amortized from the lease commencement date (the date the lessee obtains possession of the underlying asset) to the end of the lease’s term. In some cases, it may be from the commencement date to the end of the useful life of the asset. The same holds true for finance leases under ASC 842 and IFRS 16.