How is the right-of-use asset calculated and depreciated under IFRS 16?

Under IFRS 16, a lessee measures the right-of-use (ROU) asset at initial recognition based on the initial lease liability plus specific adjustments, and depreciates it systematically over the shorter of the lease term or the asset's useful life. - Initial measurement of the ROU asset (IFRS 16.24): The ROU asset comprises: (i) the initial measurement of the lease liability (present value of future lease payments discounted at the incremental borrowing rate or implicit rate); (ii) any lease payments made at or before commencement, less lease incentives received; (iii) initial direct costs incurred by the lessee; and (iv) an estimate of costs to dismantle/restore the underlying asset where an obligation exists (IAS 37 provision). - Lease liability measurement (IFRS 16.26): The lease liability is the present value of unpaid lease payments, including fixed payments (net of incentives), variable payments based on an index or rate, residual value guarantees, and exercise prices of purchase options reasonably certain to be exercised. Variable lease payments not tied to an index or rate are excluded and expensed as incurred. - Depreciation method and period (IFRS 16.31): The ROU asset is depreciated using IAS 16 principles — typically straight-line unless another systematic basis better reflects the pattern of consumption. Depreciation runs over the shorter of the lease term and the asset's useful life, unless the lessee is reasonably certain to obtain ownership (e.g., purchase option expected to be exercised), in which case depreciation runs to the end of the asset's useful life (IFRS 16.32). - Subsequent measurement — cost model default (IFRS 16.29): After initial recognition, the ROU asset is carried at cost less accumulated depreciation and impairment losses, adjusted for any remeasurement of the lease liability. A lessee may apply the revaluation model (IAS 16) to ROU assets that belong to a class of PPE measured under that model, or investment property fair value model under IAS 40.

How does a lease modification under IFRS 16.44–16.46 affect the remeasurement of both the lease liability and the ROU asset?

- Impairment (IFRS 16.33): The ROU asset is subject to IAS 36 impairment testing. A lessee applies IAS 36 to determine whether the ROU asset is impaired and to account for impairment losses identified. - Remeasurement (IFRS 16.39–16.46): When the lease liability is remeasured (e.g., change in lease term, change in index/rate), the corresponding adjustment is made to the ROU asset. If the ROU asset is reduced to zero, remaining remeasurement is recognised in profit or loss. Scenario: On 1 January 2024, a lessee enters a 5-year office lease. Annual payments of €120,000 are payable in arrears. Incremental borrowing rate: 5%. Initial direct costs: €8,000. No lease incentives or restoration obligation. Step 1 — Lease liability (PV of annuity, 5 years, 5%): PV = €120,000 × 4.3295 = €519,540 Step 2 — ROU asset: €519,540 (lease liability) + €8,000 (initial direct costs) = €527,540

When the incremental borrowing rate changes on a lease liability remeasurement triggered by a change in index or rate, what discount rate is used and how is the ROU asset adjusted?

Annual depreciation: €527,540 ÷ 5 years = €105,508/year | Account | Dr (€) | Cr (€) | |---|---|---| | Right-of-use asset | 527,540 | | | Lease liability | | 519,540 | | Cash (initial direct costs) | | 8,000 | | Account | Dr (€) | Cr (€) | |---|---|---| | Depreciation expense | 105,508 | | | Accumulated depreciation — ROU asset | | 105,508 | Interest on the lease liability in Year 1: €519,540 × 5% = €25,977 (charged to finance costs separately). - Using the wrong discount rate: Practitioners default to the incremental borrowing rate without first attempting to determine the rate implicit in the lease (IFRS 16.26). The implicit rate must be used if it can be readily determined — using the IBR when the implicit rate is available overstates the lease liability and ROU asset.

How should a lessee account for a ROU asset relating to investment property under the IAS 40 fair value model, and what disclosure does IFRS 16.48 require?

- Incorrect depreciation period: Depreciating to the end of the lease term when a purchase option is reasonably certain to be exercised — the asset should be depreciated to the end of its useful life (IFRS 16.32), not just the lease term. This is a frequent audit finding. - Omitting restoration costs from the ROU asset: Where IAS 37 requires a provision for decommissioning or reinstatement (e.g., leasehold improvements to be removed), this estimated cost must be capitalised into the ROU asset at commencement (IFRS 16.24(d)). Omission understates both the asset and the provision. - IFRS 16.24 — Components of initial ROU asset measurement - IFRS 16.26 — Lease payments included in initial lease liability measurement - IFRS 16.31–16.32 — Depreciation method, period, and purchase option exception - IFRS 16.29 — Subsequent measurement models available to lessees - IFRS 16.39–16.46 — Remeasurement of lease liability and corresponding ROU asset adjustment - IAS 36.33 (via IFRS 16.33) — Impairment of ROU assets

IFRS 16 Right-of-Use Asset Calculation

IFRS 16 Right-of-Use Asset Calculation — Core Rule

Under IFRS 16, a lessee measures the right-of-use (ROU) asset at initial recognition based on the initial lease liability plus specific adjustments, and depreciates it systematically over the shorter of the lease term or the asset's useful life.

How IFRS 16 Right-of-Use Asset Calculation Works

Initial measurement of the ROU asset (IFRS 16.24): The ROU asset comprises: (i) the initial measurement of the lease liability (present value of future lease payments discounted at the incremental borrowing rate or implicit rate); (ii) any lease payments made at or before commencement, less lease incentives received; (iii) initial direct costs incurred by the lessee; and (iv) an estimate of costs to dismantle/restore the underlying asset where an obligation exists (IAS 37 provision).

Lease liability measurement (IFRS 16.26): The lease liability is the present value of unpaid lease payments, including fixed payments (net of incentives), variable payments based on an index or rate, residual value guarantees, and exercise prices of purchase options reasonably certain to be exercised. Variable lease payments not tied to an index or rate are excluded and expensed as incurred.

Depreciation method and period (IFRS 16.31): The ROU asset is depreciated using IAS 16 principles — typically straight-line unless another systematic basis better reflects the pattern of consumption. Depreciation runs over the shorter of the lease term and the asset's useful life, unless the lessee is reasonably certain to obtain ownership (e.g., purchase option expected to be exercised), in which case depreciation runs to the end of the asset's useful life (IFRS 16.32).

Subsequent measurement — cost model default (IFRS 16.29): After initial recognition, the ROU asset is carried at cost less accumulated depreciation and impairment losses, adjusted for any remeasurement of the lease liability. A lessee may apply the revaluation model (IAS 16) to ROU assets that belong to a class of PPE measured under that model, or investment property fair value model under IAS 40.

Impairment (IFRS 16.33): The ROU asset is subject to IAS 36 impairment testing. A lessee applies IAS 36 to determine whether the ROU asset is impaired and to account for impairment losses identified.

Remeasurement (IFRS 16.39–16.46): When the lease liability is remeasured (e.g., change in lease term, change in index/rate), the corresponding adjustment is made to the ROU asset. If the ROU asset is reduced to zero, remaining remeasurement is recognised in profit or loss.

IFRS 16 Right-of-Use Asset Calculation — Practical Example

Scenario: On 1 January 2024, a lessee enters a 5-year office lease. Annual payments of €120,000 are payable in arrears. Incremental borrowing rate: 5%. Initial direct costs: €8,000. No lease incentives or restoration obligation.

Step 1 — Lease liability (PV of annuity, 5 years, 5%)

PV = €120,000 × 4.3295 = €519,540

Step 2 — ROU asset

€519,540 (lease liability) + €8,000 (initial direct costs) = €527,540

Annual depreciation: €527,540 ÷ 5 years = €105,508/year

Journal entry at commencement (1 Jan 2024)

Account	Dr (€)	Cr (€)
Right-of-use asset	527,540
Lease liability		519,540
Cash (initial direct costs)		8,000

Year-end depreciation charge (31 Dec 2024)

Account	Dr (€)	Cr (€)
Depreciation expense	105,508
Accumulated depreciation — ROU asset		105,508

Interest on the lease liability in Year 1: €519,540 × 5% = €25,977 (charged to finance costs separately).

IFRS 16 Right-of-Use Asset Calculation — Common Pitfalls

Using the wrong discount rate: Practitioners default to the incremental borrowing rate without first attempting to determine the rate implicit in the lease (IFRS 16.26). The implicit rate must be used if it can be readily determined — using the IBR when the implicit rate is available overstates the lease liability and ROU asset.

Incorrect depreciation period: Depreciating to the end of the lease term when a purchase option is reasonably certain to be exercised — the asset should be depreciated to the end of its useful life (IFRS 16.32), not just the lease term. This is a frequent audit finding.

Omitting restoration costs from the ROU asset: Where IAS 37 requires a provision for decommissioning or reinstatement (e.g., leasehold improvements to be removed), this estimated cost must be capitalised into the ROU asset at commencement (IFRS 16.24(d)). Omission understates both the asset and the provision.

IFRS 16 Right-of-Use Asset Calculation — Key Paragraphs

IFRS 16.24 — Components of initial ROU asset measurement
IFRS 16.26 — Lease payments included in initial lease liability measurement
IFRS 16.31–16.32 — Depreciation method, period, and purchase option exception
IFRS 16.29 — Subsequent measurement models available to lessees
IFRS 16.39–16.46 — Remeasurement of lease liability and corresponding ROU asset adjustment
IAS 36.33 (via IFRS 16.33) — Impairment of ROU assets