Accounting for Operating Leases

Initial Observations

Stephen H. Fuller, PhD, and Pranav Ghai, and Ariel Markelevich, PhD, CMA

This article examines the initial impact of the adoption of ASU 2016-02 (ASC Topic 842, Leases), which requires lessees to record assets and liabilities for operating leases. Under prior standards, operating lease payments were simply expensed as incurred. Under the new guidance, entities must report a liability representing the amount owed under the lease agreement and a right-of-use (ROU) asset that represents the benefits derived from use of the leased asset over the term of the lease. The standard impacts not only the balance sheet, but also some commonly used financial ratios (e.g., debt to equity, return on assets).