Operating vs finance lease
In one sentence
Under ASC 842, a lease is a finance lease if it meets any of five criteria (ownership transfer, purchase option, major part of economic life, substantially all of fair value, or specialized asset); otherwise it is an operating lease.
ASC 842 keeps two lessee classifications. A finance lease meets at least one of five criteria and expenses interest plus straight-line amortization (front-loaded total cost). An operating lease meets none and recognises a single straight-line lease cost. IFRS 16 and GASB 87 have no such split — every lessee lease is treated like a finance lease.
Cite: ASC 842-10-25-2
Right-of-use (ROU) asset
A right-of-use asset is the lessee's right to use a leased asset over the lease term, recognised on the balance sheet at the lease liability plus prepaid payments and initial direct costs, less incentives.
Read definition →Lease liability
The lease liability is the present value of the remaining lease payments, discounted at the rate implicit in the lease or the lessee's incremental borrowing rate.
Read definition →See Operating vs finance lease in a real calculation
Enter a lease and Ledgerage computes it — every figure traced back to the standard.