Lease setup
FAS 13/IAS 17
Capital lease: Gross asset and initial obligation are set up at the present value of the minimum lease payments, using the capital rate as the interest rate for the present value calculation.
Operating lease: No balance sheet impact at inception.
ASC 842/IFRS 16/GASB 87
Finance lease or ASC 842 operating lease: The initial liability is calculated as the present value of the lease payments, excluding any payments made on or before the begin date of the lease. The right-of-use asset is the initial liability, plus prepaid rent, plus initial direct costs, less lease incentives.
Short-term or low-value lease: No balance sheet impact at inception.
Regular lease activity
FAS 13/IAS 17
Capital lease: Each rent payment results in payment of interest that has accrued; whatever rent is left is applied to payment of obligation. From one payment to the next, interest accrues based on the remaining obligation; depreciation likewise accrues (usually straight line over the life of the lease, but over the economic life if the lease has an ownership transfer or reasonably certain purchase option). Each time a payment is made, the obligation payment due 12 months in the future is reclassified from long term to current obligation.
Operating lease: Each rent payment is expensed as incurred. If the rent is not equal over the lease’s life, rent expense is nonetheless recognized on an equal basis (unless the change reflects a change in asset availability, such as increased space rented); the difference between rent paid and rent expense is booked as a deferred rent liability (or asset). Executory costs are treated the same as other rent.
ASC 842/IFRS 16/GASB 87
Finance lease: Each rent payment reduces the outstanding liability. Interest accrues and is expensed, with the accrued interest added to the liability. Depreciation accrues over the life of the lease (or over the economic life, if the lease has an ownership transfer or reasonably certain purchase option). Each time a payment is made, the obligation payment due 12 months in the future is reclassified from long term to current obligation.
Operating lease (ASC 842 only): As with finance leases, each payment reduces the outstanding liability, while interest is added to the liability, but is not directly expensed. Instead, a single lease cost is recognized, representing interest and depreciation. Depreciation is calculated by starting with the liability reduction; it is then adjusted for rent leveling, prepaid/accrued rent, and amortization of initial direct costs and lease incentives.
Short-term lease: Rent is expensed as incurred, with rent leveling if needed (no rent leveling required for GASB 87). Short-term leases are not included in disclosures of future rent commitments, unless the current short-term expense “does not reasonably reflect the lessee’s short-term lease commitments” [852-20-50-8], in which case that fact is disclosed along with the amount of short-term commitments.
Low-value lease (IFRS 16 only): Like short-term leases, rent is expensed as incurred, with rent leveling if needed.