Right-of-use asset definition
/What is a Right-of-Use Asset?
A right-of-use asset represents a lessee’s right to use an underlying leased asset during the lease term. It is recorded when a lease is recognized, along with a related lease liability. Under current lease accounting, the right-of-use asset is presented separately from owned assets and is not treated as a conventional intangible asset. The asset is initially measured based on the lease liability, adjusted for items such as lease payments made at or before commencement, initial direct costs, and lease incentives. It is then amortized over the shorter of the lease term or useful life.
How to Calculate a Right-of-Use Asset
A right-of-use asset is calculated as the initial amount of a lease liability, plus any lease payments made to the lessor before the lease commencement date, plus any initial direct costs incurred, minus any lease incentives received.
For example, Inscrutable Corporation enters into a five-year lease, where the lease payments are $35,000 per year, payable at the end of each year. Inscrutable incurs initial direct costs of $8,000. The rate implicit in the lease is 8%. At the commencement of the lease, the lease liability is $139,745, which is calculated as $35,000 multiplied by the 3.9927 rate for the five-period present value of an ordinary annuity. The right-of-use asset is calculated as the lease liability plus the amount of the initial direct costs, for a total of $147,745.
How to Account for a Right-of-Use Asset
A right-of-use asset is initially recorded at lease inception as an asset, with the offsetting credit being recorded as the lease liability.
The amortization period for the right-of-use asset is from the lease commencement date to the earlier of the end of the lease term or the end of the useful life of the asset. An exception is when it is reasonably certain that the lessee will exercise an option to purchase the asset, in which case the amortization period is through the end of the asset’s useful life.
If a right-of-use asset is determined to be impaired, the impairment is immediately recorded, thereby reducing the carrying amount of the asset. Its subsequent measurement is calculated as the carrying amount immediately after the impairment transaction, minus any subsequent accumulated amortization.
At the termination of a lease, the right-of-use asset and associated lease liability are removed from the books of the lessee. The difference between the two amounts is accounted for as a profit or loss at that time.