What is the impact of ASC 842 on financial reporting?

• A. It requires operating leases to be reported on the balance sheet.
• B. It eliminates the need to report lease liabilities.
• C. It requires only finance leases to be reported on the balance sheet.
• D. It has no impact on balance sheet presentation.

Answer: (A)

Under ASC 842, leases become part of the balance sheet for lessees, not just notes or disclosures. For most leases with terms longer than 12 months, you record a right-of-use asset and a lease liability. The lease liability is the present value of remaining lease payments, while the right-of-use asset represents the lessee’s right to use the underlying asset during the lease term. This applies to operating leases as well as finance leases, which is why the guidance increases balance-sheet transparency. In the income statement, operating lease expense is typically recognized on a straight-line basis over the term, with interest on the lease liability and amortization of the right-of-use asset reported separately, resulting in a smooth overall lease cost over time. So the key impact is that operating leases must be reported on the balance sheet.