What is Right of Use Asset?
A right-of-use (ROU) asset under IFRS 16 is the asset that represents a lessee’s right to use an underlying leased asset over the lease term. It is recognised on the balance sheet at lease commencement alongside the lease liability.
How It Works
- Recognise the ROU asset at the same amount as the lease liability at commencement.
- Add any prepaid lease payments and initial direct costs.
- Deduct any lease incentives received.
- Depreciate the ROU asset over the shorter of the lease term and the asset’s useful life.
- Test the ROU asset for impairment whenever there is an indicator.
Saudi Context
Saudi-listed companies under SOCPA-adopted IFRS 16 capitalised significant ROU assets from 2019 onwards, especially in retail and telecom. ZATCA accepts the depreciation and interest expense as deductible when the lease is genuine and documented.
Example
A retailer signs a 5-year shop lease with a SAR 4.21M lease liability. The ROU asset is SAR 4.21M and is depreciated straight-line over 5 years, generating SAR 842K depreciation per year.