How to Calculate the Right of Use Asset Under a Lease Agreement

Learn how to calculate the right of use asset by adding present value of lease payments and initial direct costs using the lease interest rate or borrowing rate.

108 views

The right of use asset under a lease agreement is calculated by adding the present value of lease payments to any initial direct costs incurred by the lessee. To determine the present value, you'll use the interest rate implicit in the lease (if readily determinable) or the lessee's incremental borrowing rate. This calculation enables businesses to reflect the asset and related lease liability on the balance sheet, providing a more accurate representation of their financial position.

FAQs & Answers

  1. What is a right of use asset in lease accounting? A right of use asset represents a lessee’s right to use a leased asset for the lease term and is recognized on the balance sheet along with the lease liability.
  2. How do you determine the present value of lease payments? The present value of lease payments is calculated using the interest rate implicit in the lease or, if that is not readily determinable, the lessee’s incremental borrowing rate.
  3. What costs are included in calculating the right of use asset? In addition to the present value of lease payments, any initial direct costs incurred by the lessee related to the lease are included in the calculation of the right of use asset.