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For finance leases, ROU Asset Amortization and Interest Expense are recorded separately on the income statement. Finance leases will generally have a front-loaded expense recognition.
ROU Asset Amortization
A lessee shall amortize the ROU asset on a straight-line basis, unless another systematic basis is more representative of the pattern in which the lessee expects to consume the right-of-use asset’s future economic benefits.
A lessee shall amortize the ROU asset from the lease commencement date to the earlier of the end of the useful life of the ROU asset or the end of the lease term. However, if the lease transfers ownership of the underlying asset to the lessee or the lessee is reasonably certain to exercise an option to purchase the underlying asset, the lessee shall amortize the ROU asset to the end of the useful life of the underlying asset.
Interest Expense
Period Interest Expense is calculated as follows:
Beginning Lease Liability x Period Discount Rate = Period Interest Expense
Lease Liability
Lease liabilities are measured the same way regardless of lease classification. In each period, the liability will reflect an increase due to period interest expense which is offset by a period lease payment, as shown below:
Beginning Lease Liability + Period Interest Expense - Period Lease Payment = Ending Lease Liability
Accounting Guidance Referenced:
- ASC 842-20-25-5
- ASC 842-20-35-1
- ASC 842-20-35-7
- ASC 842-35-8
- Deloitte A Roadmap to Applying the New Leasing Standard (2020) 8.4.3.1
- PwC Leases October 2020 4.4.1