Introduction
The right-of-use (ROU) asset is one of the two balance sheet items that every lessee must now recognise under revised FRS 102 Section 20, effective for periods beginning on or after 1 January 2026. The ROU asset represents the lessee's right to use an underlying asset for the duration of the lease term. Together with the corresponding lease liability, it replaces the previous off-balance-sheet treatment of operating leases.
For entities reporting under UK and Irish GAAP, understanding how to measure, depreciate, and test ROU assets for impairment is essential for compliance with the new standard. This guide covers every aspect of the ROU asset lifecycle — from initial recognition through depreciation, subsequent measurement, impairment testing, and transition — with worked examples and journal entries.
For context on the broader changes to FRS 102 lease accounting, see our guide on FRS 102 changes 2026. For the lease liability calculation methodology, see our FRS 102 lease liability guide.
What Is a Right-of-Use Asset Under FRS 102
A right-of-use asset is a lessee's recognised asset that represents the right to use an underlying asset for the lease term. Under the revised Section 20 of FRS 102, the ROU asset appears on the balance sheet as a non-current asset — alongside property, plant, and equipment — for virtually all lease contracts.
Recognition Requirements
A lessee must recognise an ROU asset at the commencement date of the lease for all leases, except:
- Short-term leases: Leases with a remaining term of 12 months or less at commencement (or transition). Payments are expensed on a straight-line basis.
- Low-value assets: Assets of low value when new, assessed on an absolute basis. FRS 102 does not specify a monetary threshold — entities apply judgement. Typical examples include laptops, tablets, and small items of office equipment.
For all other leases — including property leases, vehicle leases, and equipment leases — the ROU asset must be recognised. There is no exemption based on materiality at the entity level; the assessment is made at the individual lease level.
What the ROU Asset Represents
The ROU asset is not the underlying physical asset itself. It is the lessee's right to use that asset. This is a conceptual distinction that matters for presentation and measurement:
- The ROU asset is presented separately from owned property, plant, and equipment (or disclosed separately in the notes)
- It is depreciated over the lease term, not the physical life of the asset (unless ownership transfers)
- It is subject to impairment testing under Section 27 of FRS 102
Initial Measurement of the ROU Asset
At the commencement date, the ROU asset is measured at cost. The cost comprises the following components:
Components of Initial Measurement
| Component | Description | Example |
|---|---|---|
| Lease liability amount | Present value of future lease payments, discounted at the obtainable borrowing rate (OBR) or the rate implicit in the lease | £530,660 |
| Plus: Initial direct costs | Incremental costs directly attributable to negotiating and arranging the lease | Legal fees: £3,000; broker commission: £2,000 |
| Plus: Prepaid lease payments | Any payments made at or before the commencement date | £10,000 deposit paid at signing |
| Plus: Restoration costs | Estimated costs of dismantling, removing, or restoring the underlying asset as required by the lease terms | Estimated dilapidations: £0 (not applicable in this example) |
| Less: Lease incentives received | Any incentives received from the lessor (rent-free periods, fit-out contributions, cash incentives) | Fit-out contribution: £15,000 |
Worked Example
Consider a 10-year commercial property lease with the following terms:
- Annual rent: £65,000, payable quarterly in advance
- Obtainable borrowing rate (OBR): 4.5%
- Legal fees: £3,000
- Broker commission: £2,000
- Prepayment at signing: £10,000 (applied against first quarter's rent)
- Lessor incentive: £15,000 fit-out contribution
- Restoration obligation: None
Step 1: Calculate the lease liability
The lease liability is the present value of the remaining future lease payments, discounted at 4.5%. For quarterly payments of £16,250 over 10 years (40 quarters), the present value is £530,660.
Use our free FRS 102 lease liability calculator to compute this precisely.
Step 2: Calculate the initial ROU asset
| Component | Amount |
|---|---|
| Lease liability | £530,660 |
| Plus: Initial direct costs (£3,000 + £2,000) | £5,000 |
| Plus: Prepaid lease payment | £10,000 |
| Less: Lease incentive received | (£15,000) |
| Initial ROU asset | £530,660 |
In this example, the direct costs and prepayment offset the incentive, and the ROU asset equals the lease liability. In practice, these components will rarely net to zero, and the ROU asset will differ from the lease liability.
Depreciation of the ROU Asset
Once recognised, the ROU asset is depreciated systematically over the lease term. FRS 102 requires the following approach:
Depreciation Period
The ROU asset is depreciated over the shorter of:
- The lease term (including any extension periods the lessee is reasonably certain to exercise), or
- The useful life of the underlying asset
Exception: If the lease transfers ownership of the underlying asset to the lessee by the end of the lease term, or the cost of the ROU asset reflects that the lessee is reasonably certain to exercise a purchase option, the ROU asset is depreciated over the useful life of the underlying asset.
For most commercial property leases, the depreciation period is the lease term, since the useful life of a building typically exceeds the lease term and ownership does not transfer.
Depreciation Method
FRS 102 requires the ROU asset to be depreciated on a straight-line basis unless another systematic basis better reflects the pattern in which the lessee expects to consume the economic benefits.
In practice, the straight-line method is used for virtually all ROU assets. The calculation is straightforward:
Monthly depreciation = Initial ROU asset ÷ Lease term in months
Worked Example
Using the example above:
- Initial ROU asset: £530,660
- Lease term: 10 years (120 months)
- Depreciation period: 120 months (lease term, since no ownership transfer)
Monthly depreciation = £530,660 ÷ 120 = £4,422.17
Annual depreciation = £4,422.17 × 12 = £53,066.00
Over the 10-year lease term, the ROU asset is fully depreciated to zero. The depreciation charge appears in the profit and loss account, typically within operating expenses.
Depreciation vs Amortisation
Both terms are used in practice when referring to the systematic allocation of the ROU asset cost. Technically, "depreciation" applies to tangible assets, while "amortisation" applies to intangible assets. Since the ROU asset represents a right (arguably intangible in nature) but is measured and presented alongside tangible assets, the FRC has adopted the term "depreciation" in the standard. Either term is acceptable in practice, but consistency within the financial statements is important.
Subsequent Measurement
After initial recognition, the ROU asset is measured using the cost model:
Carrying amount = Initial cost − Accumulated depreciation − Accumulated impairment losses
When Is the ROU Asset Remeasured?
The ROU asset is adjusted (remeasured) when the corresponding lease liability is remeasured. Common triggers for remeasurement include:
- Rent reviews: Changes in lease payments resulting from a rent review or indexation adjustment
- Change in lease term: Reassessment of extension or termination options that changes the expected lease term
- Change in purchase option assessment: A change in the assessment of whether the lessee is reasonably certain to exercise a purchase option
- Lease modifications: Changes to the scope or consideration of the lease that were not part of the original terms
When the lease liability is remeasured, the ROU asset is adjusted by the same amount. If the remeasurement reduces the ROU asset below zero, the excess is recognised immediately in profit or loss.
Practical Example: Rent Review
If a rent review at year 5 increases the annual rent from £65,000 to £72,000, the lease liability is remeasured at the present value of the revised future payments using the current OBR. The difference between the old and new lease liability is added to (or subtracted from) the ROU asset. Depreciation is then recalculated over the remaining lease term based on the revised carrying amount.
Impairment Testing
ROU assets are subject to impairment testing under FRS 102 Section 27 (Impairment of Assets). Unlike IFRS 16, which refers to IAS 36, FRS 102 has its own impairment framework — simpler in some respects, but the principles are consistent.
When to Test for Impairment
FRS 102 does not require annual impairment testing for ROU assets. Instead, an entity must assess at each reporting date whether there are any indicators of impairment. If indicators exist, the entity must estimate the recoverable amount of the asset.
Indicators of Impairment
Practical indicators that an ROU asset may be impaired include:
- Subleasing at below-market rent: The entity subleases the property at a rent lower than the head lease payments, indicating the ROU asset's value has declined
- Significant market decline: A material decline in the local property market or rental values since lease commencement
- Plans for early exit: The entity intends to exit the lease before expiry (through break clause, negotiated surrender, or assignment)
- Physical damage: Significant physical damage to the underlying asset that affects its utility
- Change in use: The asset is no longer being used for its intended purpose, or usage has materially decreased
- Vacancy: The leased property is vacant with no immediate plans for use or sublease
- Adverse business changes: A significant adverse change in the business environment or the entity's financial performance that calls into question the recoverability of the asset
Recoverable Amount
The recoverable amount is the higher of:
- Fair value less costs to sell: The amount obtainable from selling or assigning the lease, less disposal costs
- Value in use: The present value of the future cash flows expected to be derived from the asset
For property ROU assets, the value in use is typically estimated based on the expected rental income from sublease, or the business value generated from occupying the premises.
Impairment Loss Recognition
If the carrying amount of the ROU asset exceeds the recoverable amount, the excess is recognised as an impairment loss in profit or loss. The ROU asset is written down to the recoverable amount, and subsequent depreciation is calculated on the reduced carrying amount over the remaining lease term.
Impairment loss = Carrying amount − Recoverable amount
Impairment losses on ROU assets may be reversed in subsequent periods if the indicators of impairment no longer exist, but the carrying amount after reversal cannot exceed the carrying amount that would have been determined (net of depreciation) had no impairment loss been recognised.
Journal Entries
The following journal entries illustrate the ROU asset lifecycle under FRS 102:
Initial Recognition (Commencement Date)
Dr Right-of-Use Asset £530,660
Cr Lease Liability £530,660
Dr Right-of-Use Asset (direct costs) £5,000
Cr Cash / Accounts Payable £5,000
Dr Right-of-Use Asset (prepayment) £10,000
Cr Prepaid Lease Payments £10,000
Dr Cash / Accounts Receivable £15,000
Cr Right-of-Use Asset (incentive) £15,000
Net ROU asset recognised: £530,660 (£530,660 + £5,000 + £10,000 − £15,000)
Monthly Depreciation
Dr Depreciation Expense (P&L) £4,422.17
Cr Accumulated Depreciation — ROU Asset £4,422.17
Impairment Loss (If Applicable)
Assume at year 3, the carrying amount of the ROU asset is £371,462 (£530,660 − 36 months × £4,422.17), and the recoverable amount is estimated at £320,000:
Dr Impairment Loss (P&L) £51,462
Cr Accumulated Impairment — ROU Asset £51,462
After impairment, the revised carrying amount of £320,000 is depreciated over the remaining 84 months:
Revised monthly depreciation = £320,000 ÷ 84 = £3,809.52
Transition Guidance
For entities transitioning to the revised Section 20 of FRS 102, the ROU asset recognition at transition follows specific rules under the modified retrospective approach.
ROU Asset at Transition
The ROU asset at the transition date is calculated as:
ROU asset = Lease liability at transition ± Prepaid or accrued lease amounts
- If the entity has prepaid lease payments (paid in advance of recognition under the old standard), the prepayment is added to the lease liability to determine the ROU asset
- If the entity has accrued lease payments (recognised as a liability under the old straight-line model), the accrual is deducted from the lease liability
This means the ROU asset will typically differ from the lease liability at transition, reflecting any previously recognised prepayments or accruals.
No Restatement of Comparatives
The modified retrospective approach does not require restatement of comparative periods. The cumulative effect of transition is recognised as an adjustment to opening retained earnings at the date of initial application.
Cumulative Effect
Any difference between the sum of the new ROU asset and lease liability and the previously recognised lease-related balance sheet items (prepayments, accruals, onerous lease provisions) is recognised in opening retained earnings.
Worked Example: Transition
An entity transitions on 1 January 2026. For an existing operating lease:
- Lease liability at transition (PV of remaining payments at OBR): £420,000
- Prepaid lease payment on balance sheet: £8,500
- Accrued straight-line adjustment: (£3,200)
ROU asset at transition = £420,000 + £8,500 − £3,200 = £425,300
The entity removes the existing prepayment (£8,500) and accrual (£3,200) from the balance sheet, recognises the ROU asset (£425,300) and lease liability (£420,000), and records the net difference in opening retained earnings.
Practical Tips
Use a Calculator for Initial Measurement
The lease liability calculation — which underpins the ROU asset measurement — requires discounting future cash flows at the appropriate rate. Manual calculations are error-prone, particularly for leases with stepped rents, rent-free periods, or variable indexation. Use our free FRS 102 lease liability calculator to compute the lease liability and initial ROU asset accurately.
Maintain an Asset Register
Every ROU asset should be recorded in the entity's fixed asset register with the following information:
- Initial cost (broken down by component)
- Depreciation method and period
- Monthly depreciation charge
- Accumulated depreciation at each reporting date
- Any impairment losses recognised
- Remeasurement adjustments
This register is essential for producing accurate financial statements and meeting the disclosure requirements of the revised Section 20.
Depreciation vs Amortisation Terminology
As noted above, FRS 102 uses "depreciation" for ROU assets. Ensure consistency throughout the financial statements and supporting schedules. If using "amortisation" in internal reporting, make sure the statutory accounts use "depreciation" to align with the standard.
Separate Presentation
FRS 102 requires ROU assets to be presented separately from owned assets on the balance sheet, or disclosed separately in the notes. Establish the appropriate presentation approach early in the implementation process.
Consider the Interaction with Lease Liability Remeasurement
Whenever the lease liability is remeasured — whether for a rent review, a change in lease term, or a modification — the ROU asset must be adjusted by the same amount. Build this link into your accounting processes to ensure the two balance sheet items remain synchronised.
Conclusion
The right-of-use asset under revised FRS 102 Section 20 represents a fundamental change in how lessees account for their lease arrangements. Understanding the initial measurement components, the straight-line depreciation approach, the impairment triggers under Section 27, and the transition mechanics is essential for compliance.
For entities managing multiple leases, the ongoing measurement, depreciation, remeasurement, and impairment tracking can become complex. Purpose-built tools like LeaseIQ automate the extraction of lease terms from PDF documents and calculate the ROU asset, depreciation schedules, and impairment indicators — reducing manual effort and improving accuracy.
To get started, try our free FRS 102 lease liability calculator or explore how LeaseIQ can automate your lease data extraction and compliance calculations.