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Accounting for leases

The lessee could compute the periodic straight-line expense at the lease commencement date based on
the following components, divided by the lease term:

□ The total lease payments under the lease plus

□ Any initial direct costs incurred by the lessee, less

□ Any lease incentives received from the lessor

In Example 4-13, the amortization of the right-of-use asset is described as the difference between the
straight-line lease expense, as computed above, and the accretion of interest on the lease liability each
period. In order to calculate the amortization of the right-of-use asset, “interest” must be calculated
each period on the lease liability. However, there is no amount recorded as interest expense. The
“interest” amount is used to accrete the lease liability and to amortize the right-of-use asset.

Rather than calculate the periodic amortization of the right-of-use asset, the guidance in ASC 842
describes how to measure the right-of-use asset at each reporting date. ASC 842-20-35-3 describes the
measurement of the right-of-use asset at any point in time after the lease commencement date, as
follows:

□ The balance of the lease liability, adjusted for

□ Any prepaid or accrued lease payments,

□ Any unamortized initial direct costs, and

□ The remaining balance of any lease incentives received.

Both of these approaches result in the same balance for a right-of-use asset.

Example 4-13 illustrates a lessee’s subsequent measurement and recognition of an operating lease.

EXAMPLE 4-13
Lessee operating lease subsequent measurement and recognition – automobile lease

This example is a continuation of Example 4-4.

This lease is classified as an operating lease as none of the criteria for finance lease classification are
met. The right-of-use asset is $16,518 and lease liability is $16,018.

How would Lessee Corp measure the right-of-use asset and lease liability over the lease term?

Analysis

Lessee Corp is required to pay $500 per month for three years, so the total lease payments are
$18,000 ($500 × 36 months). Lessee Corp would then calculate the straight-line lease expense to be
recorded each period by dividing the total lease payments by the total number of periods. The monthly
straight-line expense would be $500 ($18,000 ÷ 36 months). The rental payment and the straight-line
expense are equal as the lease does not contain any escalation provisions or other required or optional
payments.

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