Although a lessee is required to present assets and liabilities for all leases in a similar manner, presentation of expenses and cash flows will differ based on how a lease is classified.
As discussed in ASC 842-20-45-1, a lessee should separately present a right-of-use asset and lease liability.
A lessee shall either present in the statement of financial position or disclose in the notes all of the following:
a. Finance lease right-of-use assets and operating lease right-of-use assets separately from each other and from other assets
b. Finance lease liabilities and operating lease liabilities separately from each other and from other liabilities.
Right-of-use assets and lease liabilities shall be subject to the same considerations as other nonfinancial assets and financial liabilities in classifying them as current and noncurrent in classified statements of financial position.
Financial statement users may view right-of-use assets differently than other assets; therefore, finance lease and operating lease right-of-use assets should either be presented separately from each other and other assets on the balance sheet or disclosed in the notes to the financial statements along with the balance sheet line items in which those assets are included.
Although ASC 842-20-45-1 permits disclosure in the notes in lieu of separate presentation on the balance sheet, ASC 842-20-45-3 prohibits combining finance lease and operating lease right-of-use assets on the balance sheet.
As noted in LG 4.2.2.2, initial direct costs should be included in the initial measurement of the right-of-use asset.
There are certain situations that could cause an individual right-of-use asset to have a negative balance. If this occurs, the negative balance should be presented as a liability separate and apart from the lease liability.
Right-of-use assets are subject to the same considerations as other nonfinancial assets, such as property, plant, and equipment, in classifying them as current or noncurrent in a classified balance sheet. Consistent with the classification of property, plant, and equipment, the right-of-use asset should generally be classified as non-current for the entire lease term. A right-of-use asset recorded for a lease with an initial term of 12 months or less (i.e., the short-term lease measurement and recognition exemption was not taken) may be classified as current similar to other executory contracts.
Finance lease and operating lease liabilities should be presented separately from each other and from other liabilities on the balance sheet or disclosed in the notes to the financial statements along with the balance sheet line items in which those liabilities are included. Although ASC 842-20-45-1 permits disclosure in the notes in lieu of separate presentation on the balance sheet, ASC 842-20-45-3 prohibits combining finance lease and operating lease liabilities on the balance sheet.
Lease liabilities are subject to all of the same considerations as debt instruments in classifying them as current or noncurrent in a classified balance sheet. See FSP 12 for general debt classification guidance. The lease liability essentially functions as an amortizing loan FSP 12.8 provides guidance for these types of liabilities.
Classification of the lease liability as current or noncurrent is complicated if the lease incentive to be received within one year from the balance sheet date exceeds the lease payments due within that same period. As discussed in LG 3.3.4.2, an in substance fixed lease incentive that is expected to be received after lease commencement should be included when measuring the lease liability. This generally occurs when a lessor agrees to reimburse the lessee for leasehold improvements. For example, if within one year of the balance sheet date, there is a lease incentive of $1,000,000 that will be received and the total lease payments to be paid during that period are $800,000, there would be a net $200,000 inflow. This raises a question about what amount of the lease liability, if any, should be presented in current liabilities since the net amount for the period is an inflow. The cash inflows contemplated under the lease are included in the measurement of the overall lease liability and should not be netted against other current liabilities unless permitted by other applicable literature. In this case, no payments are required in the next 12 months (because there is a net cash inflow) so the entire lease liability is reflected as noncurrent.