In short
A right-of-use asset is a lessee's right to use a leased asset for the lease term. It is recognized at lease commencement together with a lease liability, for both finance and operating leases.
Key takeaways
- It is initially measured at the lease liability plus prepaid lease payments and initial direct costs, less lease incentives received.
- For a finance lease it is amortized separately from interest on the liability; for an operating lease the two combine into one straight-line lease cost.
- Short-term leases (12 months or less, with no purchase option the lessee is reasonably certain to exercise) can be kept off the balance sheet by election.
Where it's tested
FAR: Leases — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A lessee enters into a 4-year lease for equipment with a 10-year remaining economic life. There is no purchase option and ownership does not transfer. The present value of lease payments is 55% of the equipment's fair value. How should the lessee classify this lease?