Right-of-use assets under IFRS 16

When IFRS 16 came into force, it fundamentally changed the way organisations account for leases. At the heart of this change sits the right-of-use asset, a concept that brought billions of previously off-balance-sheet obligations into the financial statements of lessees worldwide. Understanding how ROU assets work is essential for any finance team managing lease portfolios, preparing consolidated accounts, or ensuring compliance with IFRS standards.

Whether a company leases office space, vehicles, machinery, or IT equipment, the principles of right-of-use asset IFRS 16 accounting apply in largely the same way. This guide walks through the key stages, from initial recognition to balance sheet presentation, giving finance professionals a clear and practical foundation.

How IFRS 16 Changed Lease Accounting Forever

Before IFRS 16 took effect, operating leases lived entirely off the balance sheet. Companies disclosed future lease commitments in the notes, but neither an asset nor a liability appeared in the primary statements. This created a significant gap between reported financial position and economic reality, something that investors and analysts had long flagged as a weakness in financial reporting.

IFRS 16 closed that gap by requiring lessees to recognise a right-of-use asset and a corresponding lease liability for virtually all leases. The logic is straightforward: if a company controls the right to use an asset for a defined period, that right has economic value and should be reflected on the balance sheet. The result is a more transparent picture of a company’s obligations and the assets it controls, even when legal ownership sits elsewhere.

For finance teams, this shift created meaningful complexity. Lease data that previously lived in spreadsheets or operational systems suddenly needed to feed directly into the general ledger and consolidated financial statements. For growing organisations managing multiple entities, that complexity compounds quickly.

Initial Recognition and Measurement of ROU Assets

A right-of-use asset is recognised at the commencement date of a lease, which is the date the underlying asset becomes available for use. At that point, the lessee records the ROU asset and a lease liability simultaneously, creating a matched entry that reflects both the benefit and the obligation arising from the arrangement.

The initial measurement of the ROU asset includes several components:

The initial measurement of the lease liability (the present value of future lease payments)
Any lease payments made at or before the commencement date, net of any lease incentives received
Any initial direct costs incurred by the lessee
An estimate of costs to restore the underlying asset, where required by the lease terms

The lease liability itself is calculated by discounting future lease payments at the interest rate implicit in the lease, or, where that rate cannot be readily determined, at the lessee’s incremental borrowing rate. Getting this discount rate right matters significantly, as it drives both the opening liability balance and the ROU asset value. For multi-entity groups, applying consistent discount rate assumptions across subsidiaries is one of the more challenging aspects of IFRS 16 recognition.

Subsequent Measurement: Depreciation and Remeasurement

Once recognised, the ROU asset is measured using either the cost model or, in limited circumstances, the revaluation or fair value model. In practice, most organisations apply the cost model, which means the asset is carried at cost less accumulated depreciation and any impairment losses.

Depreciation is applied on a straight-line basis over the shorter of the lease term or the useful life of the underlying asset. If the lessee is reasonably certain to exercise a purchase option at the end of the lease, depreciation runs over the full useful life. This distinction is worth careful attention, as assumptions about lease term can significantly affect the depreciation profile and the carrying value of the lease asset over time.

Remeasurement comes into play when there is a change in the lease term, a change in the assessment of a purchase option, or a modification to the lease payments. In these cases, the lessee recalculates the lease liability using a revised discount rate and adjusts the ROU asset by the same amount. Lease modifications that grant the lessee an additional right of use are treated as separate leases entirely. Keeping track of these events across a large portfolio, particularly in a group with many subsidiaries, requires disciplined processes and reliable data flows.

Exemptions That Exclude Assets from IFRS 16

Not every lease arrangement triggers full ROU asset recognition. IFRS 16 provides two practical expedients that allow lessees to keep certain leases off the balance sheet, provided they elect to apply them consistently by class of underlying asset.

The two exemptions are:

Short-term leases: Leases with a term of 12 months or less at the commencement date. Note that if the lease contains a purchase option, it does not qualify as short-term.
Low-value assets: Leases where the underlying asset has a low value when new, regardless of the total lease payments involved. IFRS 16 does not specify a precise monetary threshold, but the IASB indicated assets with a value of around USD 5,000 when new as a reference point.

For leases that fall within these exemptions, payments are recognised as an expense on a straight-line basis over the lease term, similar to the old operating lease model. These exemptions can meaningfully reduce the administrative burden for companies with large volumes of small or short-duration leases, such as mobile phone contracts or low-value office equipment. However, the decision to apply them should be made thoughtfully and applied consistently.

Balance Sheet Presentation and Disclosure Requirements

IFRS 16 requires ROU assets and lease liabilities to be presented separately from other assets and liabilities in the balance sheet, or disclosed in the notes if presented within other line items. Most organisations present ROU assets within property, plant and equipment, with a clear note disclosure identifying the carrying amount attributable to right-of-use assets by class.

The disclosure requirements under IFRS 16 are extensive. Finance teams must provide a maturity analysis of lease liabilities, a reconciliation of opening and closing balances, and qualitative information about significant judgements and assumptions, including those relating to lease term and discount rates. These disclosures are designed to give users of financial statements a complete picture of the company’s leasing activity and its effect on financial position and performance.

For groups reporting under IFRS, ensuring that ROU asset disclosures are consistent and complete across all entities adds another layer of complexity to the consolidation process. This is precisely where having a structured, automated approach to group reporting makes a tangible difference. Our IFRS 16 lease solution within AARO is built to help finance teams manage this complexity, bringing lease data into the consolidation workflow in a controlled and auditable way.

Looking ahead, as lease portfolios evolve and new contracts are entered into, the ongoing measurement and disclosure of right-of-use assets will remain a live compliance requirement. Building robust processes now, supported by the right tools, positions finance teams to handle that ongoing obligation efficiently rather than reactively. If you want to see how we approach lease accounting under IFRS 16, our AARO platform is worth exploring as your organisation grows and your reporting needs become more demanding.