If a lease is classified as a finance lease, what will be the lessee’s accounting treatment?

When a lease is classified as a finance lease, the lessee must account for it by recording a right-of-use asset and a lease liability on its balance sheet. This treatment reflects the essence of finance leases, which transfer substantially all the risks and benefits associated with ownership of the leased asset to the lessee.

The right-of-use asset represents the right to use the underlying asset over the lease term, while the lease liability reflects the obligation to make lease payments. This dual recognition ensures that the financial statements accurately depict the lessee's financial position by acknowledging both the asset used in operations and the associated liability incurred from the leasing arrangement.

This approach is consistent with the accounting standard ASC 842, which aims to provide greater transparency regarding lease obligations. Options that suggest recognizing the lease as inventory, accounting for it as an expense, or not recognizing any liability do not align with the requirements for finance lease accounting, where there is a clear transfer of asset benefits and obligations.