Which statement correctly describes a common recognition between finance leases and operating leases under ASC 842?

• A. Both require recognizing a right-of-use asset and a lease liability.
• B. Only finance leases require a right-of-use asset.
• C. Only operating leases require a lease liability.
• D. Neither lease type records an asset.

Answer: (C)

Under ASC 842, lessees recognize a right-of-use asset and a lease liability for both finance and operating leases at the lease commencement. The right-of-use asset reflects the lessee’s right to use the underlying asset for the lease term, while the lease liability represents the obligation to make lease payments over that term. The difference lies in subsequent accounting: finance leases incur interest on the lease liability and amortize the right-of-use asset, leading to a front-loaded expense pattern, whereas operating leases recognize a straight-line lease expense over the term with the right-of-use asset and lease liability remaining on the balance sheet (unless a short-term lease exemption applies). So the common recognition is both asset and liability on the balance sheet, not a situation where only one type records a lease liability.