How right-of-use assets are accounted for
A right-of-use asset refers to the lessee's right to use the leased asset during the lease term. The lessee obtains the right-of-use asset through the lease contract and pays rent and other expenses during the lease period to compensate the lessor for its investment costs and reasonable profits. In accounting, a right-of-use asset is usually treated as a long-term asset that needs to be recorded and amortized according to a certain method.
1. Initial recording of right-of-use assets.
The cost of a right-of-use asset includes the amount of the lease payment, the initial direct costs associated with the leased asset, and any other expenses that need to be paid to achieve the normal use of the leased asset. At the commencement date of the lease term, the lessee shall initially account for the present value of the sum of the lease payments and the initial direct costs as the original price of the right-of-use asset, and recognize the long-term payables. If the present value of the sum of the lease payment and the initial direct cost is greater than the fair value of the leased asset less the residual value of the security provided by the lessor, the lessee should initially account for the difference as a lease liability.
2. Subsequent measurement of right-of-use assets.
During the lease period, the lessee shall use the straight-line method or other systematic and reasonable methods to depreciate the right-of-use assets and include them in the current profit or loss. The depreciation period shall be determined on the basis of the remaining lease term and the interest rate embedded in the lease as agreed in the lease contract. If the lessee is unable to reasonably determine the interest rate embedded in the lease, it shall use the incremental borrowing interest rate as the discount rate to calculate the present value of future cash flows, and use the straight-line method or other systematic and reasonable methods to depreciate the right-of-use assets.
In addition, the lessee shall also pay rent and other expenses in accordance with the lease contract, and dispose of the residual value of the right-of-use assets at the expiration of the lease term in accordance with the contract. If the lessee terminates the lease contract early, the depreciation accrued shall be adjusted to the remainder of the current lease term and the long-term payables and lease liabilities shall be adjusted accordingly.
3. Examples of accounting treatment of right-of-use assets.
Suppose a company signs a 3-year office equipment lease contract with a leasing company on January 1, 2023, with a equipment value of RMB 1 million and an annual rent of RMB 200,000, to be paid semi-annually. According to the contract, the lessee has the right to use the equipment during the lease period and returns the equipment to the lessor at the end of the lease period. The lessee is unable to reasonably determine the interest rate embedded in the lease, so the incremental borrowing rate is used as the discount rate.
1.Initial Credit.
The accounting treatment of the lessee on the start date of the lease term (January 1, 2023) is as follows:
Borrow: right-of-use assets 85 (p f, r, 3).
Unrecognized Financing Charge 15
Credit: Long-term payables 100
where p f, r, 3 denotes the present value factor of compound interest with the incremental borrowing rate as the discount rate, the future cash flow as the rent and residual value (assumed to be zero), and the discount period is 3 years. 850,000 yuan is the original price of the right-of-use assets.
2.Subsequent metering.
The accounting treatment of the lessee at each reporting date is as follows:
Debit: Long-term payable 10 (semi-annual rent).
Credit: Bank Deposit 10
Debit: Finance Fee 425 (semi-annual interest).
Credit: Unrecognized Financing Charges 425
Borrow: Administrative Fee 25 (depreciated semi-annually).
Credit: Accumulated depreciation of right-of-use assets 25
Of these, 4250,000 yuan is the interest expense incurred every six months;2.50,000 yuan is the depreciation expense accrued every six months. At the end of each reporting period, the lessee is required to include interest expense and depreciation expense for the current period in the income statement.
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