ROU Assets - What are they?

Keeping this simple, ROU (Right-of-Use) assets could be cars, vans, equipment, land, or buildings that a business has regular use of but does not legally own. Instead, they are leased.

It’s possible that at the end of the lease there could be an additional balloon payment to purchase the asset, or that leases (particularly for buildings) may be renewed. However, we’ll put those options to one side for today.

Until recently, most items that were leased were simply recorded as expenses affecting the profit and loss account. Under FRS 102, from January 2026, that’s no longer the case. Most leases will now have to be recognised on the balance sheet as a liability, and the leased item becomes a Right-of-Use asset.

If we take a motor vehicle as an example, when purchased (either outright or by hire purchase), the asset is generally depreciated over its estimated useful life based on the original purchase cost, and the business owner has full control over the asset. The owner could sell the asset whenever they wish and settle any loans, if applicable.

When an asset is leased, the lessee only has the right to use the asset during the lease term — they do not have full ownership or control of it. The value of the Right-of-Use asset is not simply the total cost of all expected lease payments. Any deposits, legal fees, disbursements, commissions received, and payments that may be due at the end of the lease must also be considered.

As a result, calculating the initial value of the Right-of-Use asset and its associated lease liability is not as straightforward as it might first appear. Under FRS 102 and IFRS 16, where a finance-style lease model applies, the asset is then depreciated on a straight-line basis over the lease term.

The market value (fair value) of the asset is considered together with all amounts already paid or received, future lease payments, and the frequency of those payments (for example, monthly, quarterly, or annually). Payments are often made in advance, which affects cash flow and the calculation of the lease liability. An interest rate is then applied to discount the payments.

The present value of the lease and the asset is calculated using the fair value of the asset together with all associated costs and future payments. This helps determine the implicit rate in the lease, which effectively represents the return or profit the lessor expects to earn from leasing the asset to the lessee.

If, for example, a bank loan were required to purchase an asset or cover rent payments, a similar interest rate concept would apply over the loan term. However, if the implicit rate cannot be readily determined, the incremental borrowing rate can be used instead (a realistic interest rate based on current lending rates available to the business).

After calculating the asset and liability values, accounting journal entries are required to regularly update the balance sheet. These entries recognise the interest on the lease liability and depreciation of the Right-of-Use asset.

Using spreadsheets and creating journal entries for Right-of-Use assets can take up a significant amount of time, whether you are an accountant or bookkeeper in practice or working in industry.

nettTracker provides tools that help streamline month-end and year-end processes, including the creation of a Right-of-Use asset and lease liability in just a few minutes. Once set up, all required accounting journal entries are generated automatically when connected to Sage Business Cloud, Xero or QuickBooks Online.

To learn more about nettTracker, visit. www.nett-tracker.com You can trial for free - no card payment details required.