Operating Lease
Category
ASC 842
An operating lease is a lease classification under ASC 842 where the lessee recognizes a right-of-use asset and lease liability on the balance sheet, but records lease expense on a straight-line basis over the lease term. It is distinguished from a finance lease by failing to meet any of the five classification criteria.
Why it matters
Operating leases are the most common lease type for real estate, office space, and many equipment leases. Under the previous standard (ASC 840), operating leases were entirely off-balance-sheet. ASC 842 brought them onto the balance sheet while preserving the straight-line expense pattern on the income statement.
The classification matters because operating and finance leases produce different income statement patterns and cash flow statement presentations. Operating leases show a single lease expense, while finance leases split the cost between amortization and interest expense.
How Arvexi handles this
Arvexi automatically classifies leases as operating or finance based on the five ASC 842 criteria. For operating leases, it generates straight-line lease expense, maintains the ROU asset and lease liability amortization schedules, and produces the correct journal entries each period, all without manual intervention.