How to measure a right of use asset

Under the revised FRS 102 Section 20, a lessee measures a right of use asset at cost on the day the lease starts: the opening lease liability, plus payments made up front, initial direct costs and any dismantling or restoration provision, less lease incentives received. Afterwards it is normally carried at cost less depreciation and impairment, adjusted whenever the lease liability is remeasured.

When does a right of use asset first appear?

The revised Section 20 applies to accounting periods beginning on or after 1 January 2026, and paragraph 20.45 requires a lessee to recognise a right of use asset and a lease liability at the commencement date of each lease that is not covered by the short term or low value exemptions. The background to the change is covered in our guide to the FRS 102 changes from January 2026, and the exemptions are explained in short term and low value lease exemptions.

The asset and the liability are linked but they are not the same number. The liability is the present value of the lease payments still to be made. The asset starts from that figure and then picks up the other costs of getting the lease in place. This page deals with the asset; the choice of rate used to discount the liability is covered in which discount rate to use for a lease liability.

What goes into the cost of a right of use asset?

Paragraph 20.46 says the asset is measured at cost at the commencement date, and paragraph 20.47 lists what cost comprises:

1. The initial measurement of the lease liability under paragraph 20.49.
2. Lease payments made at or before the commencement date, less any lease incentives received. Rent paid in advance on day one, or a premium paid to the landlord, goes here.
3. Initial direct costs incurred by the lessee.
4. Dismantling and restoration costs: any amount recognised under Section 21 as an estimate of the cost of dismantling and removing the asset, restoring the site, or returning the asset to the condition the lease requires.
5. Government grant or non exchange elements: any amount recognised under Section 24, or for a public benefit entity under paragraphs PBE34.64 to PBE34.74, where the lease contains a grant or a non exchange transaction as described in paragraph 20.35.

What counts as an initial direct cost?

The Glossary defines initial direct costs as incremental costs of obtaining a lease that would not have been incurred if the lease had not been obtained. Legal fees for the lease and an agent’s fee payable only on signing are typical examples. The test is incremental: salaries of staff who would have been paid anyway, or general overheads of looking for premises, do not qualify.

How are dilapidations treated?

Paragraph 20.48 says restoration costs are added to the asset when the lessee incurs the obligation for them. That may be on day one, for example where the lease requires a fit out to be stripped out at the end, or later as the asset is used. The provision itself is measured under Section 21; see our guide to dilapidations provisions. Where restoration costs arise from using the asset to produce inventories in a period, they go into the cost of those inventories under Section 13 instead.

What about cheap or free premises?

If rent is significantly below market because of a government grant or, for a public benefit entity, a donation, paragraph 20.35 requires the lessee to recognise that incoming resource as part of the cost of the asset. Where the payments are so low as not to be substantive, such as a peppercorn, the arrangement may not meet the definition of a lease at all. The FRC notes in paragraph B20.15 of the Basis for Conclusions that a landlord discounting a shop rent mainly to keep premises occupied would not indicate a non exchange element.

How is the asset measured after day one?

Paragraph 20.55 makes the cost model the default. Under paragraph 20.56 the asset is carried at cost, less accumulated depreciation and accumulated impairment losses, adjusted for any remeasurement of the lease liability under paragraph 20.62(c). Two alternatives apply in specific cases:

• Investment property: paragraph 20.60 requires the fair value model in Section 16 for right of use assets that meet the definition of investment property, unless the group rental exemption in paragraph 16.4A(b)(ii) is used. Paragraph 20.75 says these are presented as investment property.
• Revaluation: under paragraph 20.61, if the lessee revalues a class of owned property, plant and equipment under Section 17, it may elect to revalue all right of use assets relating to that class.

How is a right of use asset depreciated?

Paragraph 20.57 applies the depreciation rules in Section 17, covered in our guide to property, plant and equipment, subject to one specific rule on the period in paragraph 20.58:

• If the lease transfers ownership to the lessee by the end of the lease term, or the cost of the asset reflects that the lessee will exercise a purchase option, the asset is depreciated from the commencement date to the end of the useful life of the underlying asset.
• Otherwise it is depreciated from the commencement date to the earlier of the end of its useful life and the end of the lease term.

Because paragraph 20.37 says the lease term includes any rent free period, depreciation starts at commencement even if no rent is due for the first months. Section 17 requires a method that reflects the pattern in which benefits are consumed (paragraph 17.22), and for a property lease this is usually straight line. Paragraph 17.19 requires the useful life and method to be reviewed if there are indications they have changed, with changes treated as a change in accounting estimate.

What does the calculation look like?

Illustration only. A company takes a five year lease of a workshop with rent of £10,000 a year payable at the end of each year. It uses a discount rate of 7%. It pays £1,500 of legal and agent’s fees that would not have arisen without the lease, the landlord pays it a £2,000 cash incentive, and the lease requires it to strip out a mezzanine on exit, for which it recognises a provision of £3,000 on day one.

Component	£
Lease liability: present value of five payments of £10,000 at 7%	41,002
Initial direct costs	1,500
Restoration provision	3,000
Less lease incentive received	(2,000)
Cost of right of use asset	43,502

Depreciated straight line over five years, the charge is about £8,700 a year. Interest on the liability in year one is 7% of £41,002, about £2,870, so the year one charge to profit or loss is about £11,570 against cash rent of £10,000. The liability at the end of year one is about £33,872. The front loaded total cost reverses in later years as the interest charge falls.

What changes the carrying amount later?

Under paragraph 20.65, when the lease liability is remeasured because the lease payments change, the adjustment goes to the right of use asset, not to profit or loss. That covers a change in the lease term, a change in the assessment of a purchase option, a change in residual value guarantees and a change in index linked or market reviewed rent. Once the asset has been reduced to zero, any further reduction in the liability goes to profit or loss. The triggers are explained in how break clauses and options affect the lease term and rent reviews and variable lease payments.

A renegotiated lease follows paragraph 20.73. Where the scope is reduced, the asset is reduced proportionately and a gain or loss goes to profit or loss; for other modifications the asset is adjusted by the change in the liability. See accounting for a lease modification. Paragraph 20.59 also requires Section 27 to be applied to decide whether the asset is impaired, for example where premises are vacated before the lease ends.

How was the asset measured on transition?

For leases previously treated as operating leases, paragraph 1.51(b) sets the right of use asset at the date of initial application equal to the lease liability, adjusted for any prepaid or accrued lease payments in the balance sheet immediately before that date. Comparatives are not restated (paragraph 1.47). Paragraph 1.53(b) allows a lessee to rely on its previous onerous lease assessment instead of an impairment review, adjusting the asset by any onerous lease provision. Leases previously classified as finance leases simply carry forward their existing carrying amounts under paragraph 1.55.

What are the common mistakes?

• Setting the asset equal to the liability for new leases. That shortcut is a transition rule; for leases starting after adoption, paragraph 20.47 requires the full cost build up.
• Capitalising internal time or abortive search costs as initial direct costs.
• Forgetting a dilapidations obligation that exists from day one, or adding it to the liability instead of the asset.
• Depreciating over the useful life of a building rather than the lease term where no ownership transfer or purchase option is expected.
• Starting depreciation when rent begins rather than at commencement, ignoring a rent free period.
• Taking remeasurements of the liability to profit or loss instead of adjusting the asset under paragraph 20.65.

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Related Accountapedia entries

• Leases in charity accounts from 2026
• Rent free periods under the new lease model
• Renting premises from a director: lease accounting
• Accounting for leasehold improvements
• IFRS 16 leases overview

Sources

• Financial Reporting Council: FRS 102 September 2024 tmKYWO6

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.