What is a lease right-of-use asset and how is it recognized under ASC 842?

• A. A liability only
• B. An intangible asset not amortized
• C. A cash account
• D. Asset representing the lessee's right to use the underlying asset during the lease term; recognized with lease liability; categorized as operating or finance lease

Answer: (D)

Under ASC 842, a lease creates both a right-of-use asset and a lease liability. The right-of-use asset represents the lessee’s right to use the underlying asset for the lease term. At the start of the lease, you recognize the right-of-use asset together with the lease liability. The lease liability equals the present value of the lease payments, discounted at the rate implicit in the lease if determinable (otherwise the incremental borrowing rate). The right-of-use asset is initially measured at the same amount as the lease liability, plus any initial direct costs, prepayments, or incentives received, and then it is amortized over the lease term. The lease is classified as either operating or finance, and that classification drives subsequent accounting: operating leases generally recognize a straight-line lease expense, while finance leases record interest on the lease liability and depreciation (amortization) of the right-of-use asset. This choice correctly describes the right-of-use asset as an asset representing the lessee’s use of the asset, recognized with a lease liability and categorized as operating or finance.