TFX Biz-Flow Comprehensive Guide
  • Quick Start
    • Sell Module Guide
      • Introduction
      • Navigating the Sell Module
        • Dashboard
          • Features
            • Access to Critical Data
            • Interactive Reporting
            • Actionable Insights
        • Product Management
          • Overview
          • Adding a New Product & Services
          • Adding Products/Services via CSV
        • Price List Management
          • Overview
          • Setting Up & Updating Prices
        • Customers Management
          • Overview
          • Adding New Customers
          • Customer Information Management
        • Invoice Management
          • Overview
          • Invoice Creation
          • Editing and Deleting Invoices
      • Compliance with LHDN's E-Invoice Enforcement
    • Buy Module Guide
      • Introduction
      • Navigating the Buy Module
        • Dashboard
          • Features
            • Access to Critical Data
            • Interactive Reporting
            • Actionable Insights
              • Purchases with PO
              • Purchases Without PO
              • Detailed Procurement Tracking
        • Purchase Requisition
          • Overview
          • Step-by-Step Guide to Creating a Purchase Requisition
        • Initiating Quotation/Tender Process
        • Vendor Evaluation
        • Selecting a Vendor
        • Supplier Invoices and Goods Receipt
          • Goods Received Note
        • 3-Way Matching Process
        • Handling Discrepancies in Procurement
        • Inventory and Asset Management
        • Additional Procurement Scenarios
        • Conclusion
    • Pay Module
    • Accounting Module
      • Right of Use (ROU) Asset
      • General Ledger
      • Direct Costs
      • Viewing General Ledger Accounts
      • Subsidiary Ledgers
      • About Debit Note
      • Real-Time Financial Statements
    • Manage Module
      • Inventory Module
        • Inventory Management
        • Our Inventory Management Application
        • Product & Material Inventory Ledger
        • Transfers
        • Issues To Production
        • Adjustments
        • Importance of Stock Count
        • Valuation of Inventory
      • Asset Register Module
        • Non-Current Asset Register
        • Fixed Asset Register
        • Depreciation Methods
        • Disposal/Write Off of Fixed Assets
        • Asset Impairment
        • Maintenance History
      • Project Accounting Module
        • Contract/Project Accounting Module
          • Project Accounting
          • Contract Accounting Ledgers
          • Invoicing
      • Data Migration Module
        • Migration at the end of a Financial Period
        • Migration Process for Trade Receivable and Payable
        • Migration of Fixed Assets
        • Migration of Inventories
        • Migration of Other Asset, Liability, and Equity Accounts
        • Migration During a Financial Year
        • Trade Receivables & Payables
        • Our Data Migration Facilitations
        • Sales Invoice Migration
        • Vendors Invoice
  • FAQs
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  2. Accounting Module

Right of Use (ROU) Asset

An ROU asset represents a company's right to use a leased asset for a specified period as outlined in a lease agreement. This type of asset reflects the potential economic benefits the company expects to derive throughout the lease term. According to the international accounting standard IFRS 16, a lease term encompasses the non-cancellable period during which a lessee has a right to use an asset, including any extensions if the lessee is reasonably certain to exercise that option.

IFRS 16 mandates the method by which companies should recognize, measure, present, and disclose information regarding leases. The standard requires lessees to recognize assets and liabilities for most leases. Exceptions are made when the lease term is 12 months or less or when the underlying asset has a low value.

The accurate determination of an ROU asset's cost is pivotal. It involves computing the present value of lease payments over the term of the lease, discounted at the lessee's incremental borrowing rate. We provide a Microsoft Excel template to facilitate this calculation, which can be found in our knowledge database. This template assists in computing the precise cost of the ROU asset, the initial measurement of lease liability, and the accrued interest.

For example, accounting for an ROU asset and incorporating it into the balance sheet would involve the following journal entries. It should be noted that at the conclusion of the lease term, typically five years, both the Leased Liability and ROU Asset accounts will have been fully amortized to zero.

Year 1

  • Debit: ROU Asset $39,970.63

  • Credit: Lease Liability $39,770.63

  • Credit: Cash $200.00

The above entries reflect the initial capitalization of the ROU asset and recognition of the lease liability. Subsequent entries record the payment of the first year's lease liability installment, including interest, and the annual amortization of the ROU asset.

Year 2

  • Debit: Lease Liability $10,000

  • Credit: Cash $10,000

  • Debit: Interest on Lease Liability $3,374.77

  • Credit: Lease Liability $3,374.77

These entries would be repeated for years 3 and 4, adjusting the interest amount as necessary.

Year 5

  • Debit: Lease Liability $13,000

  • Credit: Cash $13,000

  • Debit: Interest on Lease Liability $1,181.82

  • Credit: Lease Liability $1,181.82

The final installment payment of the lease liability is recorded in year 5.

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Last updated 1 year ago