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Presentation and disclosure

Variable lease payments

ASC 842 does not explicitly address whether variable lease payments made for a finance lease should
be presented as lease expense (i.e., an operating expense) or interest expense in the income statement.
We believe that either presentation is appropriate but careful consideration should be given to the
economics of the lease when making this determination. For example, if a lease with all variable
payments is classified as a finance lease, no lease liability would be recorded; in this case, it would be
difficult to support presentation of the variable payments as interest expense given there is no liability
associated with the lease.

9.2.2.2 Operating lease

A lessee should present the lease expense of an operating lease as a single operating expense in income
from continuing operations. As noted in LG 4.4.2, lease expense should be calculated on a straight-line
basis. Although a lessee is not required to provide the components of lease expense, financial
statement users will be able to derive certain information from the quantitative disclosures, including
the weighted average discount rate. See LG 9.2.5 for further discussion.

9.2.3 Statement of cash flows

The following subsections address how a lessee should present cash payments for finance and
operating leases in the statement of cash flows.

9.2.3.1 Finance lease

A lessee should classify cash payments with respect to finance leases as follows:

□ Cash payments for the principal portion of the lease liability arising from a finance lease
should be classified as financing activities

□ Cash payments for the interest portion of the lease liability arising from a finance lease should
follow the guidance in ASC 230. These amounts would generally be classified as operating
activities

□ Variable lease payments and short-term lease payments not included in the lease liability
should be classified as operating activities

9.2.3.2 Operating lease

A lessee should generally classify cash payments arising from operating leases within operating
activities. The exception to this relates to lease payments associated with the cost to bring another
asset to the condition and location necessary for its intended use that are capitalized as part of the cost
of the asset. For example, certain lease payments incurred while building property, plant, or
equipment would be capitalized and should be classified as investing activities rather than operating.

9.2.3.3 Noncash transactions

As discussed in LG 9.2.5, ASC 842 requires certain quantitative disclosures. One such disclosure
relates to supplemental noncash information on lease liabilities arising from obtaining right-of- use
assets. Furthermore, ASC 230 requires disclosures for all non-cash investing and financing

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