Introduction to Lease Accounting
Understanding Leases
A lease is a contractual agreement that gives a lessee the right to control the use of an identified asset for a specified period in exchange for consideration. Under U.S. GAAP (ASC 842), most leases are recognized on the lessee's balance sheet through a Right-of-Use (ROU) asset and a lease liability, improving transparency and comparability in financial reporting.
- A lease grants the right to control an identified asset.
- The contract specifies a lease term and payments.
- Most leases create both an asset and a liability for the lessee.
- Lease accounting applies to both lessees and lessors.
Note
Lease accounting under ASC 842 is one of the most frequently tested topics on the CPA FAR examination.
Summary
Lease accounting recognizes contractual rights and obligations arising from the use of assets over time.