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Lease classification

Figure 3-1 summarizes the accounting by lessees for the different types of leases.

Figure 3-1
Overview of lease accounting by lessees

Statement Finance lease Operating lease

Balance sheet □ Record a right-of-use asset and a □ Record a right-of-use asset and a
lease liability lease liability

Income □ Interest expense is determined □ Lease expense is recorded on a
statement using the effective interest straight-line basis over the lease
method. Amortization is recorded term by adding interest expense
on the right-of-use asset (usually determined using the effective
on a straight-line basis). The interest method to the
periodic expense at the beginning amortization of the right-of-use
of the lease term will generally be asset. Unlike a finance lease,
greater than the corresponding amortization of the right-of-use
cash payments, but will decline asset is calculated as the
over the lease term as the lease difference between the straight-
liability is reduced line expense and the interest
expense on the lease liability for a
□ Interest and amortization expense given period
should generally be presented
separately in the income □ Lease expense is presented as a
statement single line item in operating
expense in the income statement
□ The right-of-use asset is tested for
impairment in accordance with □ The right-of-use asset is tested for
ASC 360 impairment in accordance with
ASC 360

Statement of □ Repayments of principal should □ Operating lease payments should
cash flows be classified as financing activities be classified as operating activities

□ Interest on the lease liability □ Operating lease payments that are
should be classified in accordance capitalized as a cost bringing
with guidance related to interest another asset to intended use
in ASC 230 should be classified as investing
activities
□ Variable lease payments should be
classified as operating activities

3-3