What is right of use lease asset?

What is right of use lease asset?

The right of use lease asset is an intangible asset that represents the lessee’s right to use an underlying leased asset for a certain period of time. It is recognized on the lessee’s balance sheet as part of the implementation of the new lease accounting standards, ASC 842 and IFRS 16.

Under these new standards, all leases with a term of more than 12 months are required to be recognized on the lessee’s balance sheet as a right of use lease asset and corresponding lease liability. This change aims to provide a more accurate representation of a company’s financial position by reflecting the economic reality of lease agreements.

The right of use lease asset is measured as the present value of the lease payments over the lease term and is subject to periodic revaluation based on changes in lease terms or discount rates. It is amortized over the lease term through lease expense in the income statement.

FAQs about right of use lease asset:

1. How is the right of use lease asset different from a tangible asset?

The right of use lease asset is an intangible asset that represents the right to use an underlying leased asset, while a tangible asset is a physical asset that can be seen and touched, such as equipment or inventory.

2. What are some examples of leases that would result in a right of use lease asset?

Examples of leases that would result in a right of use lease asset include office space leases, vehicle leases, and equipment leases.

3. How is the right of use lease asset initially measured?

The right of use lease asset is initially measured as the present value of the lease payments over the lease term, taking into account any lease incentives or direct costs.

4. How is the right of use lease asset presented on the balance sheet?

The right of use lease asset is presented on the balance sheet as a separate line item within non-current assets, separate from tangible assets.

5. How is the right of use lease asset amortized?

The right of use lease asset is amortized over the lease term through lease expense in the income statement, typically on a straight-line basis.

6. What impact does the right of use lease asset have on financial ratios?

The recognition of the right of use lease asset can impact financial ratios such as leverage ratios and asset turnover ratios due to the inclusion of lease liabilities and assets on the balance sheet.

7. How are changes in the lease term or discount rate accounted for in the right of use lease asset?

Changes in the lease term or discount rate can result in revaluations of the right of use lease asset, with corresponding adjustments to the lease liability and lease expense.

8. Are there any disclosures required for the right of use lease asset?

Yes, companies are required to disclose information about the right of use lease asset, including the carrying amount, useful life, and any impairments incurred.

9. How does the right of use lease asset impact lease accounting for lessors?

The right of use lease asset primarily impacts lease accounting for lessees, as lessors continue to recognize the underlying leased asset on their balance sheet.

10. Can the right of use lease asset be transferred or sold to another party?

The right of use lease asset may be transferred or sold to another party, subject to the terms and conditions of the lease agreement and any legal or regulatory restrictions.

11. How does the right of use lease asset impact cash flow reporting?

The recognition of the right of use lease asset does not impact cash flow reporting, as lease payments are classified as operating activities in the statement of cash flows.

12. Are there any tax implications related to the right of use lease asset?

Companies may need to consider tax implications related to the recognition and measurement of the right of use lease asset, such as the treatment of lease expense for tax purposes and any deferred tax assets or liabilities arising from the lease accounting standards.

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