Under an operating lease for PPE, which statement best describes the initial accounting?

Under an operating lease for PPE, which statement best describes the initial accounting?

• A. I/S: rent expense recognized upfront; B/S: lease liability recognized; CFS: CFO affected immediately.
• B. I/S: no change initially; B/S: asset recognized but no liability; CFS: no change initially.
• C. I/S: no change initially; B/S: no change initially; CFS: no change initially.
• D. I/S: no change initially; B/S: no change initially; CFS: no change initially, but CFO decreases as payments are made.

Answer: (D)

Under an operating lease for PPE, the lease is treated as an operating expense with payments expensed as incurred, and there is no asset or liability recognized on the balance sheet at the start. So at inception, there is no impact on the income statement or the balance sheet. The cash flow effect shows up when payments are actually made, reducing cash flow from operating activities. This is why the statement that has no initial I/S or B/S impact, but a cash outflow from operations as payments are made, is correct.

Under an operating lease for PPE, the lease is treated as an operating expense with payments expensed as incurred, and there is no asset or liability recognized on the balance sheet at the start. So at inception, there is no impact on the income statement or the balance sheet. The cash flow effect shows up when payments are actually made, reducing cash flow from operating activities. This is why the statement that has no initial I/S or B/S impact, but a cash outflow from operations as payments are made, is correct.