us gaap operating lease accounting

Accounting Treatment of Finance Lease under GAAP

In the world of accounting, the treatment of finance leases under the Generally Accepted Accounting Principles (GAAP) is a crucial aspect that provides transparency and accuracy in financial reporting. A finance lease is a type of lease that transfers substantially all the risks and rewards incidental to ownership of an asset to the lessee. In this article, we will delve into the accounting treatment of finance leases under GAAP.

Recognition and Measurement

Under GAAP, finance leases are recognized as assets and liabilities on the lessee’s balance sheet. The initial recognition of the lease liability is based on the present value of the lease payments discounted at the interest rate implicit in the lease or, if that rate cannot be readily determined, the lessee’s incremental borrowing rate. Simultaneously, the lessee recognizes a right-of-use asset at the same amount as the lease liability.

Subsequent Measurement

After initial recognition, the lease liability is …