How to Calculate a Right-of-Use Asset for IFRS 16

IFRS 16, released in 2016 and effective January 1, 2019, replaced IAS 17 and several other standards to fundamentally change how companies account for leases. 

The standard’s stated goal is to “provide relevant information in a manner that faithfully represents those transactions.” In practice, this means bringing lease obligations onto the balance sheet so stakeholders can accurately assess how leases affect a company’s financial position.

The most significant change introduced by IFRS 16 is the requirement for lessees to recognize a right-of-use (ROU) asset and corresponding lease liability for virtually all leases. 

Previously, operating leases remained off-balance-sheet, obscuring the true extent of lease commitments. Under the new framework, only short-term and low-value leases are exempt from recognition.

Calculating ROU assets and lease liabilities correctly is critical for compliance under both IFRS 16 and ASC 842. 

This guide walks through what these assets represent, how to calculate them, and what to look out for when quantifying them under different accounting standards.

What is a right-of-use asset?

A right-of-use asset represents a lessee’s right to use a leased asset over the lease term. Instead of recording ownership of the physical asset, accounting standards now require companies to recognize the value of their right to use that asset.

Under modern lease accounting standards (IFRS 16, ASC 842, and GASB 87), the ROU asset reflects the economic benefit a company gains from using leased property, equipment, or other assets. This applies to virtually all leases—real estate, vehicles, manufacturing equipment, and technology infrastructure.

The introduction of ROU assets fundamentally changed lease accounting. 

Previously, under IAS 17 and ASC 840, operating leases stayed off-balance-sheet, making it difficult for stakeholders to understand a company’s true lease obligations. The new standards bring transparency by requiring lessees to recognize both an ROU asset and a corresponding lease liability on the balance sheet.

What is a lease liability?

Before calculating the ROU asset, it’s important to understand the lease liability—the two are intrinsically connected.

The lease liability represents the present value of all future lease payments that a lessee must make over the lease term. This includes:

• Fixed lease payments
• Variable lease payments based on an index or rate
• Amounts expected to be payable under residual value guarantees
• Exercise price of purchase options (if reasonably certain to exercise)
• Termination penalties (if the lease term reflects exercising a termination option)

Calculate the lease liability by discounting these future payments to their present value using an appropriate discount rate. The discount rate should be:

1. The rate implicit in the lease (if readily determinable), or
2. The lessee’s incremental borrowing rate

The lease liability forms the foundation for calculating the ROU asset, representing the minimum starting point for the asset’s initial measurement.

Components of the ROU asset

Understanding what’s included in an ROU asset calculation matters for accurate financial reporting. The ROU asset comprises several components beyond just the lease liability:

1. Initial lease liability

The present value of future lease payments serves as the foundation of the ROU asset calculation. This is always the starting point.

2. Lease payments made at or before commencement

Any payments made to the lessor before or at the lease commencement date increase the ROU asset. These prepayments represent an additional investment in obtaining the right to use the asset.

3. Initial direct costs

Initial direct costs are incremental costs that wouldn’t have been incurred if the lease hadn’t been executed. These costs are capitalized as part of the ROU asset and include:

• External legal fees for drafting or negotiating the lease (if success-contingent)
• Commissions paid to lease agents or brokers
• Payments to existing tenants to vacate (in real estate leases)
• Lease documentation and filing fees incurred after execution

Important: Costs that would have been incurred regardless of whether the lease was executed are NOT initial direct costs. This includes:

• Employee salaries and benefits
• Internal overhead allocations
• Advertising costs
• Legal fees for general negotiation (before execution)

4. Lease incentives received

Lease incentives reduce the ROU asset. Common incentives include:

• Cash payments from the lessor to the lessee
• Rent-free periods
• Tenant improvement allowances
• Reimbursement of relocation costs
• Assumption of the lessee’s pre-existing lease with a third party

5. Estimated costs for asset removal or site restoration

Under IFRS 16, if the lease agreement requires the lessee to dismantle, remove, or restore the underlying asset to a specific condition, the estimated costs must be included in the ROU asset calculation. This provision applies when:

• The lease agreement explicitly requires restoration
• Constructive obligations exist based on the lessee’s past practices
• Legal or regulatory requirements mandate restoration

Note: ASC 842 doesn’t require inclusion of these costs in the ROU asset; instead, they’re accounted for separately under ASC 410.

How to calculate a right-of-use asset under IFRS 16

Let’s walk through a straightforward office lease to show how the calculation works in practice.

Scenario: A company signs a 5-year office lease with these terms:

• Annual payment: €50,000 (paid at the start of each year)
• First payment made at signing: €50,000
• Landlord provides a cash incentive: €20,000
• Broker commission (initial direct cost): €5,000
• Estimated cost to restore office at lease end: €8,000
• Incremental borrowing rate: 6%

Step 1: Calculate the lease liability

The lease liability is the present value of the remaining lease payments (4 payments of €50,000 each, since the first was already paid).

Using the 6% discount rate: €173,255

Step 2: Calculate the ROU asset

This €214,235 is what appears on your balance sheet as the right-of-use asset. The €173,255 lease liability also goes on the balance sheet, split between current and non-current portions.

From there, you’ll depreciate the ROU asset over the 5-year lease term (€42,847 per year on a straight-line basis) and recognize interest expense on the lease liability.

How to calculate a right-of-use asset under ASC 842

While IFRS 16 and ASC 842 share many similarities, they differ in how they calculate and present ROU assets.

Key difference: lease classification

ASC 842 retains the distinction between:

• Operating leases (most leases)
• Finance leases (previously called capital leases)

IFRS 16 treats all leases as finance leases (with limited exemptions).

Initial measurement under ASC 842

For both operating and finance leases, calculate the initial ROU asset using this formula:

ROU Asset = Lease Liability + Prepaid Rent – Deferred Rent + Initial Direct Costs – Lease Incentives

Key differences from IFRS 16:

1. No restoration costs included in ROU asset (accounted for separately under ASC 410)
2. Prepaid and deferred rent from legacy leases must be adjusted
3. Narrower definition of initial direct costs

Subsequent measurement: where ASC 842 diverges

Operating leases:

• Total lease expense recognized on straight-line basis
• ROU asset amortization “plugs” the difference between straight-line expense and interest
• Produces a single “Lease Expense” line on the income statement

Finance leases:

• Similar to IFRS 16
• Separate amortization and interest expense
• Results in front-loaded expense pattern

ROU asset amortization and depreciation

Once you’ve calculated the initial ROU asset, you need to account for how it decreases in value over the lease term through amortization or depreciation.

IFRS 16 depreciation approach

Under IFRS 16, depreciate the ROU asset from the commencement date to the earlier of:

1. The end of the useful life of the ROU asset, or
2. The end of the lease term

Generally, if:

• Ownership transfers to the lessee at lease end, OR
• The lessee is reasonably certain to exercise a purchase option

Then depreciate over the useful life of the underlying asset.

Otherwise, depreciate over the lease term.

Applying the cost model

In most cases, apply the cost model to measure the ROU asset after commencement. Under this approach, recognize the asset at cost, adjusted for accumulated depreciation and impairment, and any remeasurement of the lease liability. Depreciation is typically calculated on a straight-line basis, similar to owned property, plant, and equipment.

Two exceptions exist where alternative measurement models may be used:

• If the lessee applies the fair value model under IAS 40 (Investment Property), they may apply that model to ROU assets that meet the definition of investment property
• If the lessee applies the revaluation model under IAS 16 for a particular class of property, plant and equipment, they may elect to apply that model to ROU assets in the same class

Example continuation: annual depreciation

Using the example with an ROU asset of €214,235 over a 5-year lease term (no purchase option):

Annual depreciation = €214,235 ÷ 5 years = €42,847 per year

ASC 842 amortization approach

ASC 842 takes a different approach depending on lease classification:

Operating leases:

The ROU asset is amortized so that the total lease expense (amortization + interest) is recognized on a straight-line basis. This means:

ROU Asset Amortization = Total Lease Expense – Interest on Lease Liability

This results in decreasing amortization over time as interest expense declines.

Finance leases:

Similar to IFRS 16, the ROU asset is amortized on a straight-line basis over the shorter of:

• The lease term, or
• The useful life of the asset (if ownership transfers or purchase option is reasonably certain)

Impact on financial statements

The amortization/depreciation flows through the income statement as:

• IFRS 16: Depreciation expense (separate from interest expense on lease liability)
• ASC 842 Finance Lease: Amortization expense (separate from interest expense)
• ASC 842 Operating Lease: Part of a single lease expense line item

Getting a helping hand with your lease accounting

While the method to calculate the right-of-use asset under IFRS 16 and ASC 842 is well-defined, implementation becomes complex as the number of leases within an organization increases.

Excel spreadsheets may work for a handful of leases, but there comes a point where manual calculation and management of leases stops being practical—particularly when dealing with multiple lease modifications, remeasurements, and varying discount rates across a global lease portfolio.

This is where automated lease accounting software becomes necessary. Trullion’s AI-powered lease accounting solution handles both IFRS 16 and ASC 842 compliance, automatically calculating ROU assets and lease liabilities at scale. The platform scans contracts to extract critical data points, proposes audit-ready journal entries, and stays current with evolving regulations and disclosure requirements.

With Trullion, you can:

• Automatically calculate ROU assets and lease liabilities for any lease type
• Handle complex scenarios including modifications, remeasurements, and impairments
• Generate compliant financial statement disclosures for IFRS 16 and ASC 842
• Maintain audit trails connecting every calculation back to source documents
• Scale your lease accounting process without adding headcount

To learn more about how Trullion can simplify your lease accounting process and maintain compliance across multiple accounting standards, get in touch with us.