What does the right-of-use asset represent?

• A. The owner's right to sell the asset
• B. The lessee's right to use the underlying asset for the lease term
• C. The lessor's residual value
• D. The asset's fair value at lease inception

Answer: (B)

The right-of-use asset is the lessee’s asset that represents the right to use the underlying asset for the lease term. When a lease starts, the lessee recognizes a lease liability for the obligations to make payments and a corresponding right-of-use asset. This asset captures the economic benefit of using the asset over the lease term, not ownership. It is measured initially as the lease liability plus any lease payments made before or at commencement, plus initial direct costs, minus any lease incentives received, and then depreciated over the shorter of the lease term or the asset’s useful life. It isn’t the owner’s right to sell, the lessor’s residual value, or the asset’s fair value at inception.