Under ASC 842, what does the lessee recognize for an operating lease?

Under ASC 842, what does the lessee recognize for an operating lease?

• A. A right-of-use asset and lease liability at the present value of lease payments.
• B. An expense equal to lease payments each period.
• C. An asset equal to the total lease payments.
• D. A liability only.

Answer: (A)

Under ASC 842, the lessee records a right-of-use asset and a lease liability for an operating lease. The lease liability is measured at the present value of the lease payments over the lease term, discounted at the rate implicit in the lease (or the incremental borrowing rate if the implicit rate isn’t readily determinable). The right-of-use asset is recognized for the lessee’s right to use the underlying asset and is initially the same as the lease liability, adjusted for factors such as lease incentives, prepayments, and initial direct costs. Over time, the liability accrues interest and is reduced by lease payments, while the asset is amortized. In the income statement, operating leases typically show a single lease expense on a straight-line basis, but the balance sheet shows both the right-of-use asset and the lease liability. This brings the lease onto the balance sheet, rather than recording only an expense, only a liability, or an asset equal to the total payments.

Under ASC 842, the lessee records a right-of-use asset and a lease liability for an operating lease. The lease liability is measured at the present value of the lease payments over the lease term, discounted at the rate implicit in the lease (or the incremental borrowing rate if the implicit rate isn’t readily determinable). The right-of-use asset is recognized for the lessee’s right to use the underlying asset and is initially the same as the lease liability, adjusted for factors such as lease incentives, prepayments, and initial direct costs. Over time, the liability accrues interest and is reduced by lease payments, while the asset is amortized. In the income statement, operating leases typically show a single lease expense on a straight-line basis, but the balance sheet shows both the right-of-use asset and the lease liability. This brings the lease onto the balance sheet, rather than recording only an expense, only a liability, or an asset equal to the total payments.