Right-of-Use (ROU) Asset

Category

Balance Sheet

Units

Currency

US-GAAP elements

OperatingLeaseRightOfUseAssetFinanceLeaseRightOfUseAssetRightOfUseAssetObtainedInExchangeForOperatingLeaseLiability

Reference

ASC 842, Leases

Source

Reported in SEC EDGAR filings (US-GAAP XBRL taxonomy)

A right-of-use (ROU) asset is a lessee's right to use a leased asset, such as an office, store, warehouse, or piece of equipment, for the lease term. Under ASC 842, a company that leases an asset records a right-of-use asset on its balance sheet together with a lease liability for the payments it owes.

Before ASC 842, operating leases stayed off the balance sheet and appeared only as rent expense and a footnote. The standard brought them on, so a company that leases most of its property now reports both the asset and the obligation.

At the start of a lease, the ROU asset is measured as the lease liability, the present value of the remaining lease payments, adjusted for lease payments made in advance, initial direct costs, and lease incentives received. Companies can elect not to recognize leases with a term of 12 months or less.

Operating lease and finance lease ROU assets are presented separately, or their balance-sheet line is disclosed. In XBRL filings the operating lease asset is tagged OperatingLeaseRightOfUseAsset and the finance lease asset, after accumulated amortization, FinanceLeaseRightOfUseAsset; many companies include finance lease assets within property, plant and equipment. The ROU assets a company takes on during the period in exchange for new operating lease liabilities are a non-cash transaction, disclosed as RightOfUseAssetObtainedInExchangeForOperatingLeaseLiability.

The two lease types are expensed differently. An operating lease produces a single straight-line lease cost in operating expenses. A finance lease is treated like financed asset ownership: the ROU asset is amortized and interest accrues on the liability. For analysis, large operating lease balances act like debt: retailers, restaurants, and airlines can carry ROU assets and lease liabilities that rival their borrowings, so comparisons of leverage should decide consistently whether to include them.