How Right-of-Use Assets Are Presented on the Balance Sheet

Right-of-use (ROU) assets represent the lessee’s right to use an underlying asset for the lease term under IFRS 16 and ASC 842. Their introduction transformed lease accounting by bringing operating leases onto the balance sheet. These assets, together with their related lease liabilities, reflect the long-term financial commitments that companies have under leasing arrangements. Presenting ROU assets accurately ensures transparency about leverage, capital intensity, and future cash flow obligations.

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How right-of-use assets arise

An ROU asset is recognized at lease commencement, representing the economic benefit the lessee obtains from controlling the use of an asset during the contract period. It equals:

Initial measurement = Lease liability + initial direct costs + prepaid lease payments – lease incentives received.

Example:If a company enters a five-year equipment lease with annual payments of 50,000 and incurs 5,000 in legal fees, the present value of the lease payments (discounted at 6 percent) might be 210,000. The company records:

• Debit: Right-of-Use Asset 210,000

• Credit: Lease Liability 210,000

and adds the 5,000 legal fees to the ROU asset.

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Presentation on the balance sheet

ROU assets are presented within non-current assets, typically alongside property, plant, and equipment (PPE). Corresponding lease liabilities are split into current and non-current portions.

Example:

• Non-Current Assets:

  • Property, Plant and Equipment 1,500,000

  • Right-of-Use Assets 215,000

• Current Liabilities:

  • Lease Liabilities (45,000)

• Non-Current Liabilities:

  • Lease Liabilities (170,000)

This presentation shows that leased assets add to total capital employed, while the lease liability increases total debt.

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Journal entries over the lease term

At the start of the lease:

• Debit Right-of-Use Asset 215,000

• Credit Lease Liability 215,000

Each reporting period:

• Debit Interest Expense (Lease Liability × Discount Rate)

• Debit Amortization Expense (ROU Asset ÷ Lease Term)

• Credit Lease Liability (Payment Amount)

Example (first year):Interest 12,600; Amortization 43,000; Payment 50,000.

This approach mirrors the financing nature of most leases, producing higher expense recognition in earlier years due to declining interest over time.

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Standards under IFRS and US GAAP

• IFRS 16: Applies a single on-balance-sheet model for lessees. All leases—except short-term (≤ 12 months) and low-value leases—create both an ROU asset and a lease liability.

• US GAAP (ASC 842): Retains two types of leases—finance and operating—but both appear on the balance sheet. The main difference lies in expense presentation: IFRS 16 combines depreciation and interest, while US GAAP shows straight-line lease expense for operating leases.

Both frameworks require disclosure of the carrying amounts of ROU assets by asset class and detailed maturity analyses for lease liabilities.

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Impact on financial performance and ratios

Recognition of ROU assets increases total assets and liabilities, often altering leverage ratios such as debt-to-equity and debt-to-EBITDA. EBITDA generally rises because the former rent expense is replaced by depreciation and interest. Analysts must adjust historical ratios to maintain comparability across reporting periods.

For example, a company with previously off-balance-sheet operating leases may show a sudden 15 percent rise in total assets after adopting IFRS 16 or ASC 842, even though its cash flows remain unchanged.

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Disclosures required for right-of-use assets

Both frameworks require:

• The carrying amount of ROU assets by class (e.g., property, vehicles, equipment).

• Additions, depreciation, and impairment losses.

• Expense by lease type (short-term, variable, low-value).

• Maturity analysis of lease liabilities showing undiscounted cash flows.

These disclosures provide users with insight into the scale and composition of lease commitments.

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Operational considerations

ROU asset accounting has made leasing a strategic decision visible to investors. Companies now weigh lease versus buy choices more carefully, as both affect leverage and reported asset base. Effective management of lease data—tracking renewals, discount rates, and impairment indicators—is essential for accurate reporting. For analysts, evaluating ROU assets helps assess capital intensity, cash-flow predictability, and future debt-servicing capacity.

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