when a lease of more than 12 months is initiated the lessee must account for it as a lease liability and an asset right of use on the balance sheet the intent behind the change is to reduce the ability of organizations to manipulate the balance sheet and create a more faithful representation of a business s rights and obligations 3
this new standard does not apply to 4operating lease vs finance leaseoperating and finance leases are similar for accounting purposes they are both treated as a right of use asset and a lease liability they are recorded on the company s balance sheet as a result they can affect a company s financial ratios such as debt to equity return on assets or solvency if companies use a significant amount of leased assets 5 however there are several differences operating lease characteristics include 6finance lease characteristics include 6