What does operating lease mean on the CPA exam?
Operating lease. A lease that does not transfer control. The lessee still records a right-of-use asset and a liability, but reports a single straight-line lease cost.
Defined against ASC 842-20-25-6.
Which CPA exam sections use operating lease?
Operating lease appears in 6 CPA exam sections: AUD, BAR, FAR, ISC, REG, TCP.
What is the difference between operating lease and finance lease?
Both put the same right-of-use asset and lease liability on the balance sheet with the same entry at commencement. Classification changes only the expense pattern and the caption: a finance lease reports front-loaded interest plus straight-line amortization, an operating lease reports one straight-line lease cost. Total expense over the term is identical either way. (ASC 842)
Other terms defined against ASC 842-20
- lease liability: The lessee's obligation to make the remaining lease payments, measured at their present value.
- right-of-use asset: The lessee's asset representing its right to use the leased item for the lease term.
Related terms
- finance lease: A lessee lease that meets one of five transfer-of-control tests.
- sales-type lease: A lessor lease that transfers control of the asset, so the lessor derecognizes it and records selling profit at commencement.
- direct financing lease: A lessor lease where control transfers only because a third-party guarantee makes collection probable.
- straight-line: Spreading an amount evenly across the periods it covers.
- direct skip: A transfer straight to someone two or more generations below the transferor, such as a grandchild.
- accretion expense: The increase in an asset retirement obligation from the passage of time, measured by the interest method at the credit-adjusted risk-free rate in effect when the liability was first measured.