How to Identify the Right-to-Use Asset in a Lease
To properly identify and account for the ROU asset, consider the following:
- Specific Identifiable Asset: Is the asset clearly stated in the contract? The asset must be physically distinct (ex., a building, equipment, or vehicle) and not interchangeable.
- Control Over Use: Does your organization have the right to determine how and for what purpose the asset is used during the lease term?
- Exclusive Benefit: Is the asset dedicated to your organization for the lease period, with no substitution rights for the lessor?
- Measurement Inputs: Once identified, the ROU asset value typically includes:
- Present value of lease payments
- Initial direct costs
- Prepaid lease amounts
- Less any lease incentives received
Quick Checklist for Identifying a Right-to-Use Asset
- Is the asset explicitly or implicitly identifiable in the contract?
- Does your organization control how the asset is used?
- Is the asset used exclusively by your organization during the lease term?
- Are you recognizing the appropriate value, including lease payments, initial costs, and incentives?
Why It Matters in Public Finance
For government and nonprofit organizations, accurately identifying the right-to-use asset ensures compliance with GASB 87 or ASC 842, improves financial transparency, and supports better decision-making for budgeting and long-term planning.
What’s important here?
The right-to-use asset in a lease is the lessee’s recognized value of the leased asset on the balance sheet. Identifying this asset correctly is essential for lease classification, financial reporting, and regulatory compliance in public sector finance.
