A right-of-use (ROU) asset is the amount a lessee recognises on its balance sheet representing the right to use a leased asset for the term of the lease. Under IFRS 16 and its Australian equivalent AASB 16, the ROU asset is initially measured at the present value of future lease payments, plus initial direct costs, prepaid amounts, and estimated make-good costs, less any lease incentives received.
If your organisation leases office space, equipment, or vehicles, those leases now appear on your balance sheet as both an ROU asset and a corresponding lease liability. This guide explains what the ROU asset is, how it's calculated, and where finance teams commonly go wrong.
Updated April 2026.
Before IFRS 16 took effect (for most organisations, financial years beginning on or after 1 January 2019), operating leases were largely invisible on the balance sheet. Companies disclosed future commitments in the notes to their financial statements, but nothing appeared as an asset or liability. That approach made it genuinely difficult to compare the financial position of organisations that owned their assets with those that leased them.
The International Accounting Standards Board designed IFRS 16 to fix this. The core principle is straightforward: if you control the right to use an asset for a period of time, that right has economic value and should appear on your balance sheet. The ROU asset represents that value. Its paired entry, the lease liability, reflects your obligation to make future payments.
For Australian reporters, AASB 16 is the local equivalent and is substantively identical to IFRS 16 for lessees. The ROU asset recognition and measurement requirements are the same under both standards.
The initial measurement of the ROU asset starts with the lease liability and then adds several adjustments. Specifically, the initial ROU asset equals:
Getting each of these inputs right at the commencement date matters because every subsequent calculation (depreciation, impairment, modification adjustments) flows from this opening figure. Errors here compound over the life of the lease. For a deeper look at the calculation mechanics, the IFRS 16 calculations guide walks through the Excel setup in detail.
Once recognised, the ROU asset is typically carried at cost less accumulated depreciation and any accumulated impairment losses. The depreciation model is straightforward.
The ROU asset is depreciated on a straight-line basis over the shorter of the asset's useful life or the lease term. If you have a reasonable certainty of exercising a purchase option at the end of the lease, then you depreciate over the useful life of the underlying asset instead.
Determining the correct depreciation period requires judgement. The lease term under IFRS 16 is not just the non-cancellable period. It includes any extension options the lessee is reasonably certain to exercise and excludes any termination options the lessee is reasonably certain to exercise. This assessment must be made at commencement and reassessed when a significant event or change in circumstances occurs.
Impairment testing also applies. ROU assets are subject to IAS 36 (AASB 136 in Australia), which means that if indicators of impairment exist, you need to assess whether the carrying amount exceeds the recoverable amount and write down accordingly.
Note that IFRS 16 also permits a revaluation model for ROU assets in the same class as property, plant, and equipment where the lessee applies the revaluation model to owned assets. This is less common in practice but is available where relevant.
A lease modification is any change to the scope or consideration of a lease that was not part of the original terms. Common examples include extending the lease term, adding or removing leased space, or renegotiating the rental amount. When a modification occurs, it triggers a remeasurement of the lease liability first, with the corresponding adjustment flowing through to the ROU asset.
When you remeasure the lease liability upward (for example, when extending a lease), the ROU asset increases by the same amount. When the liability decreases (for example, after a partial termination reducing leased space), the ROU asset decreases. If the carrying amount of the ROU asset is reduced to zero but a further reduction is required, the excess is recognised in profit or loss.
Some modifications are treated as a separate new lease entirely, such as when the modification grants an additional right-of-use asset not included in the original lease and the lease payments increase commensurately. In those cases, a new ROU asset is recognised for the added component at commencement of the modified lease.
Lease modifications are one of the most error-prone areas in practice. Organisations with large portfolios often face dozens of modifications each month, making manual tracking unreliable. The IFRS 16 audit preparation checklist covers what auditors specifically look for in modification accounting.
The ROU asset and the lease liability always exist together; one cannot be recognised without the other. But they behave differently over time, and this is something finance teams frequently find counterintuitive.
The lease liability unwinds at the interest rate used to discount the lease payments. Early in the lease, a larger proportion of each payment reduces interest rather than principal, similar to a mortgage. The liability declines more slowly at first and accelerates toward the end of the lease term.
The ROU asset depreciates on a straight-line basis. It reduces by the same amount each period regardless of the payment pattern. Because the two balances move at different rates, the carrying value of the ROU asset and the outstanding lease liability will almost never match after commencement (unless the discount rate happens to produce level amortisation). This is expected and correct, not an error.
The income statement also reflects this split. Depreciation on the ROU asset runs through operating expenses. Interest on the lease liability runs through finance costs. This changes key financial ratios compared to the old operating lease treatment, including EBITDA, which increases because lease costs are now below the EBITDA line. For a detailed view of these financial statement effects, see the post on how IFRS 16 affects financial statements.
Here is a simplified example to ground the concepts above.
Scenario: An Australian company enters a 5-year office lease with monthly payments of AUD 10,000. The incremental borrowing rate is 5% per annum. The company incurs AUD 5,000 in initial direct costs (legal fees). There are no lease incentives and no make-good obligation.
Step 1: Calculate the present value of lease payments. Using a monthly discount rate derived from the 5% IBR*, the present value of 60 monthly payments of AUD 10,000 is AUD 533,503.
Step 2: Calculate the initial ROU asset.
The initial lease liability is AUD 533,503 (the present value of payments only, before adding direct costs).
Step 3: Calculate Year 1 depreciation. The ROU asset is depreciated on a straight-line basis over 5 years (60 months). Annual depreciation = AUD 538,503 / 5 = AUD 107,701 per year (approximately AUD 8,975 per month).
At the end of Year 1, the ROU asset carrying value is approximately AUD 538,503 minus AUD 107,701 = AUD 430,802. Meanwhile, the lease liability has reduced by actual payments made less interest accrued, arriving at a different balance of AUD 436,953. Both are correct but carry a different profile due to the interest cost.
*Note that the interest rate can be calculated as nominal or effective interest, which will produce slightly different present values. The figures above use an effective interest rate approach.
These five errors appear repeatedly in practice, including in auditor findings:
All of the steps above (present value calculation, initial direct cost capture, depreciation scheduling, modification remeasurement, and impairment assessment) need to be repeated accurately for every lease in your portfolio, every month. For organisations with dozens or hundreds of leases, that is not a realistic manual task.
LOIS is an IFRS 16 lease accounting platform built and supported by CA-qualified lease accounting experts. It automates the full ROU asset lifecycle: initial measurement at commencement, straight-line depreciation scheduling, remeasurement on modification, and impairment testing triggers. Every calculation is stored with a full audit trail, so the figures are auditor-ready at any point in the lease term.
For organisations managing property, fleet, and equipment leases in a single portfolio, LOIS also handles the AASB 16 / IFRS 16 disclosures and general ledger integrations that sit downstream of the ROU asset calculation.
An ROU asset is classified as a non-current asset on the balance sheet, similar to property, plant, and equipment. However, it represents a right to use an underlying asset rather than ownership of that asset. Under IFRS 16, ROU assets are presented separately from owned PP&E or disclosed in the notes.
The ROU asset represents the economic value of using the leased asset over the lease term. The lease liability represents the obligation to make future lease payments. They are recognised together at commencement but unwind at different rates: the asset depreciates straight-line, while the liability reduces using the effective interest method.
Yes. ROU assets are subject to the impairment requirements of IAS 36 (AASB 136 in Australia). If there are indicators that the carrying amount of the ROU asset exceeds its recoverable amount (for example, a leased site that is no longer in use), an impairment test must be performed and any write-down recognised in profit or loss.
Yes, for lessees, AASB 16 is substantively identical to IFRS 16. The ROU asset recognition, initial measurement, subsequent measurement, and disclosure requirements are the same. Australian organisations apply AASB 16; the underlying principles and calculations covered in this guide apply equally.
At lease expiry, the ROU asset's carrying value should be nil (assuming it has been fully depreciated over the lease term with no impairment adjustments). The lease liability should also be nil at that point, as all payments have been made. Both are derecognised from the balance sheet when the lease ends or is terminated.