Theory and Practice
At each period-end (e.g., month or year-end), lessees under IFRS, UK GAAP and US GAAP (finance leases) record depreciation of the ROU asset and interest accrual on the lease liability. This is illustrated in Example 4.1. Click Next to see the examples.
For US GAAP Operating Leases, no separate depreciation or interest journal entries are recorded in the general ledger when they were processed at the time of the lease payment. Instead, the single lease expense entry (as illustrated above) accomplished both: it effectively records the period’s cost of using the asset and the interest on the liability in one net amount. The ROU asset’s accumulated depreciation is updated indirectly through that entry, and the lease liability is increased by an implied interest portion then decreased by payment.
Irrespective of the approach to the entries chosen, the lessee’s Income Statement simply shows “Lease (rent) expense” for the period (e.g., $10,000), which includes both interest and depreciation components. In other words, under ASC 842 operating lease:
· Depreciation Expense on the ROU asset is not reported separately, and
· Interest Expense on the lease liability is not reported separately.
These are combined into a single operating expense to produce a straight-line total lease cost, per ASC 842’s requirements. (However, balance sheet amounts do reflect the ROU asset depreciation and liability interest accretion behind the scenes. Footnote disclosures typically reveal total lease expense and the portion that is fixed vs variable, etc., but not as separate line items on the face of the Income Statement.) This is illustrated in Example 4.2. Click Next to see the examples.
It is not a strict GAAP requirement to split the current and non-current components of the Lease Liability on the face of the Balance Sheet. However, many investors and lenders require this. An optional set of entries, to split the liability components at period end, and combine them again on the first day of the next period, are shown in Example 4.3. Click Next to see the examples.