Under ASC 842, which lease classifications exist?

• A. Operating lease and finance lease
• B. Capital lease and operating lease
• C. Long-term lease and short-term lease
• D. Current lease and noncurrent lease

Answer: (A)

Under ASC 842, leases are classified into two categories: finance lease and operating lease. A finance lease is one that transfers substantially all of the ownership risks and rewards to the lessee, so the lessee recognizes a right-of-use asset and a lease liability, depreciates the asset, and records interest expense on the liability. An operating lease does not transfer those risks and rewards; the lessee recognizes lease expense on a straight-line basis over the term, while the balance sheet shows a right-of-use asset and a lease liability (with short-term exemptions for very short-term leases). The term "capital lease" comes from older standards and is replaced by "finance lease" under ASC 842. Choices about long-term versus short-term or current versus noncurrent are not classifications of the lease itself; they describe duration or balance sheet presentation, not the type of lease.