In lessee accounting under ASC 842/IFRS 16, which statement is true about capital/finance leases vs operating leases?

• A. The classification is irrelevant to asset and liability recognition.
• B. Capital lease results in recording an asset and a liability; operating lease recognizes a right-of-use asset and a lease liability without capitalization of the asset in some cases.
• C. Operating leases always capitalize the underlying asset on the balance sheet.
• D. Both lease types avoid recognizing any lease liability.

Answer: (B)

Under ASC 842/IFRS 16, the basic idea is to bring leases onto the balance sheet by recognizing a right-of-use asset and a lease liability for almost all leases. The difference between finance (capital) leases and operating leases is how the asset is presented and how costs flow through the income statement.

A finance lease is treated as if you own the asset: you record an asset and a corresponding liability, then you depreciate the asset and incur interest on the liability over the term. An operating lease, on the other hand, does not capitalize the underlying asset as a fixed asset owned by the company. Instead you still record a right-of-use asset and a lease liability, but the expense is recognized as lease payments over time (typically straight-line), not as depreciation plus interest. This is why the statement that a finance lease yields an asset and a liability, while an operating lease yields a right-of-use asset and a lease liability without capitalizing the underlying asset in the same way, is correct.

The other options don’t fit because operating leases do not present the underlying asset as a traditional owned asset, and both lease types do involve recognizing a lease liability; they aren’t irrelevant to asset and liability recognition, and operating leases do not always capitalize the underlying asset as if owned.