Under which accounting standard do initial lease conditions influence the proper treatment of a lease on the books?

• A. IFRS 16
• B. ASC 842
• C. ASC 605
• D. ASC 210

Answer: (B)

The key idea is that lease accounting at inception is driven by the terms of the lease and how those terms are measured under the relevant standard. Under ASC 842, the lessee recognizes a right-of-use asset and a lease liability at the commencement date. The size of both depends on the initial lease conditions: fixed payments, variable payments (to the extent they’re fixed or dependent on an index), the lease term (including options that are reasonably certain to be exercised), initial direct costs, and any lease incentives. The lease liability is the present value of minimum lease payments, and the right-of-use asset is measured at the lease liability plus any prepaid amounts and initial direct costs, minus incentives. Because those initial terms determine what is included in the measurement and how long the lease term is considered, they directly influence how the lease is presented on the books from day one.

IFRS 16 has a similar approach for recognizing leases on the balance sheet, but the question’s options point to ASC 842 as the US GAAP standard that governs this treatment. ASC 605 relates to revenue recognition, not lease accounting, and ASC 210 covers broader balance sheet guidance rather than lease-specific recognition.