Lease Accounting (ASC 842)
ASC 842 requires lessees to recognize virtually all leases on the balance sheet as right-of-use assets and lease liabilities, distinguishing between finance leases and operating leases.
Explanation
Under ASC 842, lessees classify leases as either finance leases (similar to the old capital lease) or operating leases. Both types result in a right-of-use (ROU) asset and a lease liability on the balance sheet. The key difference is in expense recognition: finance leases front-load expense through amortization and interest, while operating leases recognize a single straight-line lease expense.
Lessor accounting remains largely unchanged from ASC 840, with sales-type, direct financing, and operating lease classifications. Short-term leases (12 months or less) may be exempt from balance sheet recognition. The standard also addresses sale-leaseback transactions, lease modifications, and variable lease payments.
Key Points
- •Both finance and operating leases go on the balance sheet for lessees
- •Finance leases: amortization + interest expense (front-loaded)
- •Operating leases: single straight-line expense
- •Short-term lease exemption for leases of 12 months or less
Exam Tip
Know the criteria that distinguish a finance lease from an operating lease, and how each affects the income statement and balance sheet differently.
Frequently Asked Questions
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