Right-of-Use Asset Under FRS 102 Section 20
The right-of-use asset is what sits on the balance sheet against the lease liability. It is measured at cost at commencement, then depreciated and tested for impairment like any other non-current asset.
What the asset is made of
At the commencement date the right-of-use asset is measured at cost, and FRS 102.20.47 sets out what that cost comprises. It is a closed list: a cost that does not meet one of these descriptions does not reach the asset by another route.
FRS 102 Reference: FRS 102.20.46-20.48
| Component | Reference | What it covers |
|---|---|---|
| The lease liability | 20.47(a) | The present value of the future lease payments |
| Payments made at or before commencement | 20.47(b) | Less any lease incentives received |
| Initial direct costs | 20.47(c) | Incremental costs of obtaining the lease that you would not have incurred otherwise |
| Estimated restoration costs | 20.47(d) | Dismantling, removing or restoring the asset to the condition the lease requires |
The formula
Everything above, in the order it is usually built up.
Right-of-use asset at commencement
Depreciation
The asset is depreciated on a straight-line basis over the shorter of the lease term and the useful life of the underlying asset. There is an exception: where the lease transfers ownership by the end of the term, or where a purchase option is reasonably certain to be exercised, depreciation runs over the useful life of the asset instead.
FRS 102 Reference: FRS 102.20.55-20.61
Why profit falls in year one
Depreciation is straight line but interest on the liability is front-loaded, because the liability is at its largest at the start. The combined charge therefore exceeds the old straight-line operating lease expense in the early years and falls below it later, even though the cash paid is identical throughout. The total charged over the life of the lease is the same; only its shape has changed.
Where the cost now sits
Impairment
A right-of-use asset is tested for impairment in the same way as other assets when there is an indicator that it may be impaired: vacated premises, a loss-making site, or an asset no longer used. Where an impairment is recognised, depreciation for the remaining term is recalculated on the reduced carrying amount.
Presentation and disclosure
Right-of-use assets are disclosed by class, showing the carrying amount, additions and depreciation for the period. Lease102 produces this as a statutory Right-of-Use Assets note, with cost, accumulated depreciation and net book value, as a PDF for the audit file and as Excel for accounts production.
FRS 102 Reference: FRS 102.20.81