Right of use asset
AccountingThe capitalised right to use a leased asset over the lease term, recognised opposite the lease liability.
When a lease is capitalised under IFRS 16, the company recognises both sides: a liability for the payments owed, and an asset representing the right to use the thing for the lease term. Initially they are close to equal.
The asset is then depreciated on a straight line basis while the liability unwinds on an effective interest basis, so they diverge over the life of the lease. That divergence is why total expense is front loaded even though the cash rent is flat.
It is an operating asset, not a financial one. It sits inside the operating business and generates the EBITDA being valued, which is why the liability is added in the enterprise to equity bridge while the asset is not deducted.
For valuation, the practical consequence is that any lease heavy business needs consistent treatment across the comp set: either capitalise everyone or adjust everyone back to a rent expense basis, but never mix the two in one table.
Worked example
The same ten year lease creates a 772 right of use asset alongside the 772 liability.
The asset depreciates straight line at about 77 a year. The liability unwinds on an effective interest basis, falling slowly at first because early payments are mostly interest.
By the midpoint the asset is around 386 while the liability is around 432, so they no longer offset. That divergence is why total expense is front loaded.