Which statement best describes the treatment ASC 842 requires for leases?

Which statement best describes the treatment ASC 842 requires for leases?

• A. Operating leases must be reported on the balance sheet.
• B. Operating leases can be kept off balance sheet with footnote disclosure only.
• C. Only finance leases must be on the balance sheet.
• D. Leases are no longer required to be reported.

Answer: (A)

Under ASC 842, leases are recognized on the balance sheet for most arrangements. This means a lessee records a right-of-use asset and a lease liability for leases with terms longer than twelve months, including operating leases. Footnote-only disclosures are not sufficient, because the liability and the corresponding asset reflect the company’s legal obligations and resource use. This change from prior guidance was meant to give a clearer picture of a company’s lease commitments. The accounting treatment applies to leases beyond the short-term exemption (which allows a short-term lease, typically twelve months or less, not to be recognized on the balance sheet). So, leases can no longer be kept off the balance sheet just by relying on footnotes, and the statement that operating leases must be reported on the balance sheet best describes ASC 842’s requirement.

Under ASC 842, leases are recognized on the balance sheet for most arrangements. This means a lessee records a right-of-use asset and a lease liability for leases with terms longer than twelve months, including operating leases. Footnote-only disclosures are not sufficient, because the liability and the corresponding asset reflect the company’s legal obligations and resource use. This change from prior guidance was meant to give a clearer picture of a company’s lease commitments. The accounting treatment applies to leases beyond the short-term exemption (which allows a short-term lease, typically twelve months or less, not to be recognized on the balance sheet). So, leases can no longer be kept off the balance sheet just by relying on footnotes, and the statement that operating leases must be reported on the balance sheet best describes ASC 842’s requirement.