Lease classification (ASC 842)
Under ASC 842 a lessee records a right-of-use asset and a lease liability for nearly every lease over 12 months. The lease is classed as a finance lease or an operating lease, which changes how expense is shown.
A finance lease meets any of five tests, such as ownership transfer, a purchase option reasonably certain to be exercised, a major part of economic life or substantially all of fair value. An operating lease shows a single straight-line lease cost.
Example. A 5-year lease of a machine with a 6-year life covers a major part of its life, so it is a finance lease with separate interest and amortization.
By Binod Raj Singh, CPA (licensed in Montana) · Updated for the 2026-2027 exam windows · Last updated 2026-11-05