Under ASC 842, how are leases recorded and what is the difference in expense recognition between finance leases and operating leases?

• A. Leases are recorded as a right-of-use asset and lease liability; finance leases accrue depreciation and interest, while operating leases recognize a single straight-line lease expense.
• B. Leases are recorded only as lease liabilities; both finance and operating leases recognize separate depreciation.
• C. Leases are not recognized on the balance sheet; only cash payments are expensed.
• D. Leases are recorded as revenue streams for the lessee; irrelevant to asset.

Answer: (A)

Under ASC 842, leases are brought onto the balance sheet: you recognize a right-of-use asset and a lease liability at the start of the lease for most agreements longer than a year.

The difference in expense recognition comes from how the lease is classified. For a finance lease, the lessee effectively finances the asset, so the income statement shows depreciation expense on the right-of-use asset and interest expense on the lease liability. This results in two separate expense components (depreciation and interest) over the term.

For an operating lease, the lessee does not split the cost into depreciation and interest on the income statement. Instead, there is a single lease expense recognized on a straight-line basis over the lease term. The balance sheet still reflects the right-of-use asset and the lease liability, and lease payments reduce the liability over time.