In an operating lease, how is the lease expense recognized over the lease term?

• A. A single straight-line lease expense over the lease term.
• B. Expense is recognized only when cash is paid.
• C. Depreciation and interest are recognized separately.
• D. Expense is recognized only at end of term.

Answer: (A)

Under operating leases, the lease expense is recognized on a straight-line basis over the lease term. This means the same amount is charged to the income statement each period, even if the actual cash payments are uneven or front-loaded. The lessee records a right-of-use asset and a lease liability at the start, and the single lease expense reported each period reflects the combined effect of using the asset and the financing of the obligation, smoothed evenly across the term. This differs from finance leases, where depreciation of the asset and interest on the lease liability are shown separately. It’s not based solely on when cash is paid or reserved for the end of the term.