Last updated: [May, 2026]
Right-of-use assets (ROU) represent a lessee’s right to use an asset over the course of a lease.
More formally, an ROU asset is an identified property, plant, or equipment—in other words, an identified asset—that is leased by an entity. The use of this asset by the lessee must be pursuant to the definition of the right of use in the new lease accounting standards: ASC 842 for US GAAP, GASB 87 (called lease asset) for US governmental entities, and IFRS 16 for international accounting.
Most lease assets are now recorded on the Balance Sheet in the form of an ROU Asset and Lease Liability. Right-of-use assets are intangible assets.
Under ASC 842, the amortization period is the length of the lease term, except when ownership is transferred to the lessee at the end of a finance lease. In this case, the lease is amortized over the useful life of the asset.
ROU stands for “right of use.” The concept of right-of-use is now a crucial aspect of lease accounting within the parameters of the new lease accounting standards. These accounting standards characterize how a lessee should record the value of the ROU Asset and Lease Liability over the period of a contract.
The ROU Asset is calculated as:
The initial amount of the lease liability
+
Lease payments made to the lessor at or before the lease commencement date
+
Initial direct costs incurred
-
Lease incentives received
=
ROU asset
Each component of this equation proves important in understanding the value of the ROU asset. The ROU Asset calculation begins with the lease liability because it is the present value of future lease payments.
Initial direct costs are also important for the calculation of the ROU asset because they are connected directly to the asset in the lease that the lessee has the right to use during the lease term.
Most considerations for ROU asset calculation are the same for both finance and operating leases. For both classifications of leases, an ROU Asset has to:
Finance Lease ROU Assets:
Operating Lease ROU Assets:
Operating vs. Finance Lease ROU Assets
|
Operating Lease ROU Asset |
Finance Lease ROU Asset |
|
|
Initial Measurement |
Initially measured as the lease liability, plus lease payments made at or before commencement, plus initial direct costs, minus lease incentives received. |
Initially measured as the lease liability, plus lease payments made at or before commencement, plus initial direct costs, minus lease incentives received. |
|
Subsequent Measurement |
The ROU asset is reduced each period by the difference between straight-line lease expense and interest on the lease liability. |
The ROU asset is amortized separately from the lease liability, on a straight-line basis over the lease term or useful life of the asset if longer. |
|
Amortization Pattern |
Amortization is recorded as Operating Lease Expense and is calculated as the total lease payments divided by the lease term. |
Amortization is recorded on a straight-line basis, even if each period interest expense declines over time as the lease liability decreases. |
|
Impact on Income Statement |
The lessee recognizes a single lease expense on a straight-line basis. |
The lessee recognizes two expenses: amortization expense and interest expense. Total expense is usually higher in earlier periods and lower in later periods. |
|
Impact on Balance Sheet |
The ROU Asset is presented as an ROU Asset. Operating and lease liability is presented as both short and long term lease liabilities. The liability declines using the effective interest method. |
The ROU Asset is presented as an ROU Asset. Finance and lease liability is presented as both short and long term lease liabilities. The liability declines using the effective interest method. |
An example of the calculation of an operating lease right-of-use asset is as follows:
An asset has a five-year rental period without a renewal option, a $10,000 lease payment at the beginning of each month, and an incremental borrowing rate of 6% with initial direct costs of $2,000.
First, calculate the lease liability, which is the present value of each of the 60 monthly payments discounted at 6%
The lease liability is $509,842.
The ROU asset is the lease liability ($509,842) + initial direct costs ($2,000) + payment made at the start date ($10,000) - lease incentives ($0) = $521,842.
Here is a sample of what the amortization schedule would look like for the first three months of the operating lease term:
|
Month |
Beginning Lease Liability |
Interest |
Payment |
Ending Lease Liability |
Beginning ROU Asset |
Amortization |
Ending ROU Asset |
Operating Lease Expense |
|
1 |
$509,842 |
$2,549 |
$10,000 |
$512,391 |
$521,842 |
$7,484 |
$514,358 |
$10,033 |
|
2 |
$512,391 |
$2,512 |
$10,000 |
$504,903 |
$514,358 |
$7,521 |
$506,837 |
$10,033 |
|
3 |
$504,903 |
$2,475 |
$10,000 |
$497,378 |
$506,837 |
$7,559 |
$499,278 |
$10,033 |
Under ASC 842, the initial lease liability and ROU asset are calculated the same as operating leases. In this example, the initial lease liability is $509,842, and the initial ROU asset is $521,842.
The difference is in what happens after commencement. For an operating lease, the lessee recognizes one straight-line lease expense each month. For a finance lease, the lessee recognizes interest expense on the lease liability and amortization expense on the ROU asset separately.
For a finance lease, the ROU asset is amortized on a straight-line basis over the lease term:
521,84260=8,697
So, the monthly ROU asset amortization would be approximately $8,697.
Here is a sample of what the finance lease amortization schedule would look like for the first three months:
|
Month |
Beginning Lease Liability |
Interest Expense |
Payment |
Ending Lease Liability |
Beginning ROU Asset |
Amortization |
Ending ROU Asset |
Amortization Expense |
|
1 |
$509,842 |
$2,549 |
$10,000 |
$512,391 |
$521,842 |
$8,697 |
$513,145 |
$8,697 |
|
2 |
$512,391 |
$2,512 |
$10,000 |
$504,903 |
$513,145 |
$8,697 |
$504,448 |
$8,697 |
|
3 |
$504,903 |
$2,475 |
$10,000 |
$497,378 |
$504,448 |
$8,697 |
$495,751 |
$8,697 |
The lease liability decreases the same way it does for an operating lease: each payment is split between interest expense and principal reduction. The ROU asset, however, is reduced by straight-line amortization and interest expense is recorded separately.
The objective of the disclosure requirements is to provide transparent, useful information about a company’s leasing activities. Lessees shall include a general description of leases, details on how variable expenses are determined, and a narrative regarding the options to extend or terminate that are recognized or not recognized as part of the ROU Asset and Lease Liability, and residual value guarantees are expected to be paid by the lessee to the lessor.
Lessees should also include finance lease cost, separating both the amortization of the right-of-use assets and interest on lease liabilities; operating lease cost; variable lease cost; sublease income; net gain or loss recognized from sale and leaseback transactions; and cash paid for amounts included in the measurement of lease liabilities.
Furthermore, lessees should include the weighted average remaining lease term and weighted average discount rate separately for both finance and operating leases, as well as a maturity analysis showing undiscounted cash flows for the next 5 years separately and cash flows thereafter separated by operating and finance leases.
Under GASB 87, government entities who are lessees recognize a lease liability and an intangible right-to-use lease asset, often called a lease asset, for leases that meet the standard’s definition. Unlike ASC 842, GASB 87 uses a single lease accounting model based on the idea that leases finance the right to use an underlying asset.
A GASB 87 lease asset is measured using the lease liability, plus payments made at or before commencement and certain initial direct costs, minus lease incentives. Short-term leases with a maximum possible term of 12 months or less are excluded from lease asset and liability recognition. Governmental funds may also require year-end conversion entries to move from modified accrual reporting to the full accrual basis used in government-wide financial statements.
For a deeper dive, see Crunchafi’s existing guide: What is GASB 87? Everything You Need to Know.
Under IFRS 16, lessees recognize a right-of-use asset and lease liability for most leases, unless the lease is short-term or the underlying asset is low value. IFRS 16 uses a single lessee accounting model, so it does not separate leases into operating and finance lease classifications the way ASC 842 does. Instead, the ROU asset is generally depreciated, and interest expense is recognized on the lease liability. Same lease math, fewer classification gymnastics.
The IFRS 16 ROU asset is initially measured using the lease liability, plus payments made at or before commencement, less lease incentives, plus initial direct costs and applicable restoration or removal obligations. The key difference from ASC 842 is subsequent measurement: ASC 842 keeps separate operating and finance lease models, while IFRS 16 generally produces a front-loaded expense pattern for lessees.
For more detail, see Crunchafi’s IFRS 16 vs. ASC 842 comparison.
When a lessee subleases an asset to a third party, the original lessee becomes an intermediate lessor. Under ASC 842, the accounting depends on the classification of both the original lease and the sublease. If the sublease is classified as an operating lease, the intermediate lessor generally continues accounting for the original lease as it did before the sublease began. If the sublease term is longer than the remaining term of the original lease, a remeasurement of the original lease term may be necessary.
However, if the remaining head lease cost is greater than expected sublease income, the ROU asset may need to be assessed for impairment under ASC 360.
When a lease change, such as a change to the lease term or reassessment of an option to renew or terminate, a remeasurement of the Lease Liability and ROU Asset is required. Lessees should re-evaluate the lease payments, allocating consideration to the lease and non-lease components. The lessee should also update the discount rate and reassess the classification of the lease. When the Lease Liability is remeasured, the ROU Asset will also change. If the ROU Asset is reduced to zero, any remaining balance is recorded as a Gain or Loss.
Under ASC 842, ROU Assets do not impact how leases are treated for federal income tax purposes.
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A right-of-use asset represents a lessee’s right to use an asset over the course of a lease. Typically, it’s an identified property, plant, or equipment that is leased by an entity.
Right-of-use assets are calculated by finding the sum of the initial amount of the lease liability, the lease payments made to the lessor at or before the lease commencement date, and the initial direct costs incurred. Once you find that sum, subtract the lease incentives received. Then you will be able to calculate your ROU asset.
Right-of-use assets are generally classified as non-current assets on a balance sheet.
Right of use refers to the lessee’s right to use an asset over the duration of a lease.
Right-of-use assets can be either an operating lease or a finance lease.
ROU Assets are recorded on the balance sheet as noncurrent assets.
An ROU Asset is measured by taking the initial amount of the lease liability plus any lease payments made to the lessor at or before the lease commencement date, plus initial direct costs incurred, minus lease incentives received from the lessor at or before commencement.
ROU Assets are amortized on a straight-line basis for the life of the lease.
A higher discount rate causes the ROU Asset to be lower, and a lower discount rate causes the ROU Asset value to be higher.
When a lease modification does not meet the requirements necessary to be reported as a separate new lease, the existing lease is modified. The type of modification to the lease will dictate how the ROU Asset is affected.
ROU Assets are long-lived nonfinancial assets and fall within the scope of Topic 360: Property, Plant and Equipment. An impairment is usually not within the control of a lessee. When an ROU Asset is impaired, the ROU Asset value is reduced; however, the Lease Liability is not.
The calculations for determining the ROU Asset are the same regardless of lease classification. Once the lease classification is determined, the subsequent measurement of the ROU Asset is based on that classification. For Finance Leases, the amortization of the ROU Asset occurs on a straight-line basis and is recorded separately from Interest Expense. For Operating Leases, straight-line expense is recorded as total payments divided by the lease term.
An ROU asset represents a lessee’s right to use an underlying asset during a lease term. A fixed asset represents an asset the company owns, such as equipment, vehicles, or buildings.
Under IFRS 16, lessees use a single lease accounting model, so most leases result in a right-of-use asset and lease liability with depreciation and interest expense. Under ASC 842, lessees classify leases as either operating leases or finance leases. Initial measurement is generally similar, but subsequent measurement and income statement presentation differ.
An ROU asset is generally amortized under ASC 842, although many people casually refer to the reduction as depreciation. For finance leases, the ROU asset is typically amortized on a straight-line basis over the shorter of the lease term or useful life. For operating leases, ROU asset amortization is calculated so total lease expense remains straight-line.
When a lease is modified, the lessee determines whether the change should be accounted for as a separate lease. If not, the lease liability is remeasured using updated lease payments, term, or discount rate, and the ROU asset is adjusted by the same remeasurement amount. Lease modifications can increase or decrease the ROU asset depending on the revised lease terms.
An ROU asset should not be a negative balance. If remeasurement, impairment, incentives, or other adjustments would reduce the ROU asset below zero, the lessee should record a gain or loss on the Income Statement.
