In this article

ROU Asset Recognition and Processing Example

The ROU asset value for each charge is calculated for each charge with lease component charge type selected.

The following examples demonstrate the ROU recognition and recording process.

Example 1 - Annual Rent

An expense lease has the following criteria:

  • The lease type is Short Term
  • Discount rate = 5.51%
  • Lease payments: 
    • 100,000 Base rent at end of year 1
    • 110,000 Base rent at end of year 2
    • 125,000 Base rent at end of year 3

Calculate ROU Asset Amount

The following equation is used to calculate the net present value:

NVP = ∑ lease payment / (1 + discount rate %) ^ t , where t is the period number (1, 2, 3, etc.)

NPV = 100,000/(1+0.0551)^1 + 110,000/(1+0.0551)^2 =+ 125,000/(1+0.0551)^3

NPV = 94,778 +98,811 + 106,421 = 300,000

The journal entries are as follows with the posting date as the lease accounting standard start date or the lease commencement date: 

Asset Recognition Table
ROU Asset   300,000  
  Lease Liability   300,000

Calculate Amortization Expense and Interest Expense

In addition to recognizing the ROU asset amount, expense amounts are also calculated: 

  • For a finance lease, the amortization expense is calculated as follows: ROU asset value/number of future payments.

    • Amortization Expense = 300,000 / 3 = 100,000

  • For an operating lease, the interest expense is calculated as the weighted average of all future charge's payment.

    • Interest Expense = (100,000 + 110,000 + 125,000)/3 = 111,667

Calculate Interest Paid

The interest paid for the charge is calculated as follows: 

[ROU asset value - (sum of all payments made up to the invoice date) + (sum of all interest paid recorded up to the invoice date)] * discount rate

  • Year 1 Interest Paid: 300,000 x 5.51% = 16,535
  • Year 2 Interest Paid: (300,000 – 100,000 + 16,535) x 5.51% = 11,935
  • Year 3 Interest Paid: (300,000 – 100,000 - 110,000 + 16,535 + 11,935) x 5.51% = 6,530

Calculate Amortization Component (Operating Lease)

The amortization component for the charge is calculated as follows: 

Interest Expense - Interest Paid

  • Year 1 Amortization Component: 111,667 – 16,535 = 95,132
  • Year 2 Amortization Component: 111,667 – 11,935 = 99,732
  • Year 3 Amortization Component: 111,667 – 6,530 = 105,137

Invoice Creation for an Operating Lease (No Accumulated Amortization Account)

The following table is an example of the invoices that are created for an operating lease, where the invoice period is after the lease accounting standard start date.

Also, on the PLM Property Lease Management Setup, Use ROU Accumulative Amortization Account is turned off.

Asset Recognition Table
Year 1 invoice
Lease Liability   100,000     First year payment
  AP   100,000   First year payment
Year 1 journal entries
Lease Expense   111,667     Interest Expense from the ROU Asset calculation
  Lease Liability   16,535   First year Interest Paid
  ROU Asset   95,132   First year Amortization Component
           
Year 2 invoice
Lease Liability   110,000     Second year payment
  AP   110,000   Second year payment
Year 2 journal entries
Lease Expense   111,667     Interest Expense from the ROU Asset calculation
  Lease Liability   11,935   Second year Interest Paid
  ROU Asset   99,735   Second year Amortization Component
           
Year 3 invoice
Lease Liability   125,000     Third year payment
  AP   125,000   Third year payment
Year 3 journal entries
Lease Expense   111,667     Interest Expense from the ROU Asset calculation
  Lease Liability   6,530   Third year Interest Paid
  ROU Asset   105,137   Third year Amortization Component

Invoice Creation for an Operating Lease (with Accumulated Amortization Account)

The following table is an example of the invoices that are created for an operating lease, where the invoice period is after the lease accounting standard start date.

Also, on the PLM Property Lease Management Setup, Use ROU Accumulative Amortization Account is turned on.

Lease Expenses Table
Year 1 invoice
Lease Liability   100,000     First year payment
  AP   100,000   First year payment
Year 1 journal entries
Lease Expense   111,667     Interest Expense from the ROU Asset calculation
  Lease Liability   16,535   First year Interest Paid
  ROU Asset Accumulated Amortization   95,132   First year Accumulated Amortization Component
           
Year 2 invoice
Lease Liability   110,000     Second year payment
  AP   110,000   Second year payment
Year 2 journal entries
Lease Expense   111,667     Interest Expense from the ROU Asset calculation
  Lease Liability   11,935   Second year Interest Paid
  ROU Asset Accumulated Amortization   99,735   Second year Accumulated Amortization Component
           
Year 3 invoice
Lease Liability   125,000     Third year payment
  AP   125,000   Third year payment
Year 3 journal entries
Lease Expense   111,667     Interest Expense from the ROU Asset calculation
  Lease Liability   6,530   Third year Interest Paid
  ROU Asset Accumulated Amortization   105,137   Third year Accumulated Amortization Component

Invoice Creation for a Financial Lease (No Accumulated Amortization Account)

The following table is an example of the invoices that are created for a financial lease, where the invoice period is after the lease accounting standard start date.

Also, on the PLM Property Lease Management Setup, Use ROU Accumulative Amortization Account is turned off.

Invoice Creation Table
Year 1 invoice
Lease Liability   100,000     First year payment
  AP   100,000   First year payment
Year 1 journal entries 
Lease Expense   16,535     First year Interest Paid
  Lease Liability   16,535   First year Interest Paid
Amortization Expense   100,000     Amortization expense from ROU asset calculation
  ROU Asset   100,000   Amortization expense from ROU asset calculation
           
Year 2 invoice
Lease Liability   110,000     Second year payment
  AP   110,000   Second year payment
Year 2 journal entries  
Lease Expense   11,935     First year Interest Paid
  Lease Liability   11,935   First year Interest Paid
Amortization Expense   100,000     Amortization expense from ROU asset calculation
  ROU Asset   100,000   Amortization expense from ROU asset calculation
           
Year 3 invoice
Lease Liability   125,000     Third year payment
  AP   125,000   Third year payment
Year 3 journal entries 
Lease Expense   6,350     First year Interest Paid
  Lease Liability   6,350   First year Interest Paid
Amortization Expense   100,000     Amortization expense from ROU asset calculation
  ROU Asset   100,000   Amortization expense from ROU asset calculation

Invoice Creation for a Financial Lease (with Accumulated Amortization Account)

The following table is an example of the invoices that are created for a financial lease, where the invoice period is after the lease accounting standard start date.

Also, on the PLM Property Lease Management Setup, Use ROU Accumulative Amortization Account is turned on.

Invoice Creation Table
Year 1 invoice
Lease Liability   100,000     First year payment
  AP   100,000   First year payment
Year 1 journal entries 
Lease Expense   16,535     First year Interest Paid
  Lease Liability   16,535   First year Interest Paid
Amortization Expense   100,000     Amortization expense from ROU asset calculation
  ROU Asset Accumulated Amortization   100,000   Accumulated amortization expense from ROU asset calculation
           
Year 2 invoice
Lease Liability   110,000     Second year payment
  AP   110,000   Second year payment
Year 2 journal entries  
Lease Expense   11,935     First year Interest Paid
  Lease Liability   11,935   First year Interest Paid
Amortization Expense   100,000     Amortization expense from ROU asset calculation
  ROU Asset Accumulated Amortization   100,000   Accumulated amortization expense from ROU asset calculation
           
Year 3 invoice
Lease Liability   125,000     Third year payment
  AP   125,000   Third year payment
Year 3 journal entries 
Lease Expense   6,350     First year Interest Paid
  Lease Liability   6,350   First year Interest Paid
Amortization Expense   100,000     Amortization expense from ROU asset calculation
  ROU Asset Accumulated Amortization   100,000   Accumulated amortization expense from ROU asset calculation

Back to top ▲

Example 2 - Monthly Rent

An expense lease has the following criteria:

  • Discount rate = 5.51%
  • Lease payments: 
    • 12 months in 2016 - 1,000 per month
    • 12 months in 2017 - 1,100 per month
    • 12 months in 2018 - 1,200 per month

    • The residual value at the end of the lease

The lease accounting standards start in September 2016. The ROU asset value is calculated using the future rent payments: 

  • 4 payments of 1,000
  • 12 payments of 1,100
  • 12 payments of 1,200

Calculate ROU Asset Amount

When using the Microsoft Excel formula to calculate the NPV, the ROU asset values is 15,530.

The journal entries are as follows with the posting date as the lease accounting standards (e.g., ASC 842/IFRS 16) start date or the lease commencement date: 

ROU Asset Table
ROU Asset 15,530  
Lease Liability   15,530

Calculate Amortization Expense and Interest Expense

In addition to recognizing the ROU asset amount, expense amounts are also calculated: 

  • For a finance lease, the amortization expense is calculated as follows: ROU asset value/number of future payments.

    • Amortization Expense = 15,530 / 28 = 555

  • For an operating lease, the interest expense is calculated as the weighted average of all future charge's payment.

    • Interest Expense = (1,000 x 4 + 1,100 x 12 + 1,200 x 12) / 28 = 1,129