Home > Accounting Entries > Assets > Right-To-Use
Definition:
Post introduction of IFRS 16 - Leases, assets obtained on operating leases are required to accounted as similar to finance leases. An asset is created and recorded as Right-To-Use asset for the tenure of the lease term. There are few exceptions such as, short-term leases (generally less than 12 months) and leases of low value items. Right-To-Use asset is recognised with corresponding impact to Lease Liabilities.
Right-To-Use is the discounted value of future lease rentals payable by the business (lessee) to the lessor. This right-to-use asset is amortised over the period of lease on straight line basis or any other method best-suited and justified by the business entity. It is also subject to Impairment assessment in case any sign of permanent reduction in value is observed.
Accounting Entries:
Recognition of Right-To-Use Asset:
Right-To-Use A/c DR
Lease Liabilities A/c CR
Cash/Bank A/c CR
Amount: Right-To-Use Asset is equal to discounted value of future lease rentals payable by the business and any down payment made upfront before or at the inception of the lease.
Amortisation of Right-To-Use Asset:
Amortisation Expense A/c DR
Accumulated Amortisation A/c CR
Amount: Amortisation expense is computed on straight line basis for the initial recognition of the asset spread over the tenure of the lease asset.
Pre-mature termination of the lease:
Loss on Termination A/c DR
Accumulated Amortisation A/c DR
Lease Liabilities A/c DR
Right-To-Use A/c CR
Cash/Bank A/c CR
Gain on Termination A/c CR
Amount: On the occasion of pre-mature termination of the lease contract, remaining balance of right to use asset and lease liabilities needs to be reversed out from the financial statements. This may involve payment of penalities which can be accounted as 'Loss on Termination'. If the Right-To-Use Asset > Lease Liabilities, then loss. If the Right-To-Use Asset < Lease Liabilities, then gain.