A right-of-use asset, or ROU asset, is the lessee's recognized right to use an underlying asset during the lease term. It is an intangible contractual right represented as an asset; it is not ownership of the underlying equipment, vehicle, or building.
Measure the opening right
Begin with the initial lease liability. Add lease payments made at or before commencement and qualifying initial direct costs. Subtract lease incentives received. A cost qualifies as an initial direct cost only when it would not have been incurred if the lease had not been obtained. General legal review, internal payroll, and due diligence usually fail that test.
For example, a warehouse lease has an opening liability of $168,494.55, $3,000 of qualifying direct costs, and a $5,000 incentive. Its opening ROU asset is $166,494.55. The linked worked example recomputes each amount. The liability and asset differ because they represent different measurement bridges.
Subsequent measurement depends on finance or operating classification and can be affected by remeasurement or impairment. Do not force the asset to equal the liability after commencement. Read initial ROU measurement in ASC 842-20-30-5 and subsequent measurement in ASC 842-20-35-7.
Put the concept to work
Apply this concept
- Measure and reconcile a lessee ROU asset from liability, commencement payments, incentives, qualifying initial direct costs, amortization or single-cost mechanics, and supplied impairment effects.
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Build on these ideas
- Lease liability — Apply
To apply this concept: Required. The initial liability is the starting point for ROU-asset cost.
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- Finance lease—lessee — Apply
Required level here: apply. Required. Finance accounting separates ROU amortization from liability interest.
- Lease impairment and sublease boundary — Understand
Required level here: apply. Required. Impairment acts on the ROU asset rather than the lease liability.
- Operating lease—lessee — Apply
Required level here: apply. Required. ROU reduction is the reconciling component of the operating single-cost model.