Lesson 3 of 8 · All lessons in this module
- What a lease is and how it is classifiedVideo lesson
- Lessee accounting: the IFRS model and US GAAP finance leasesVideo lesson
- US GAAP operating leases and the effect on ratiosVideo lesson
- Lessor accounting: finance versus operating leases
- Defined contribution and defined benefit pension plansVideo lesson
- Share-based compensation: stock grants, options and SARsVideo lesson
- Presentation and disclosure: leases, pensions and share-based pay
- Integrated cases: reading the pension, lease and share-based pay notes
Lesson 3 of 8 · 13 min
US GAAP operating leases and the effect on ratios
A US GAAP operating lease puts the same liability on the balance sheet as a finance lease, but turns interest and amortisation into one flat lease expense and puts the whole payment in operating cash flow.
In short
- Inception is identical: ROU asset = lease liability = PV of payments; the liability is reduced exactly as under the finance model.
- The difference is amortisation: ROU amortisation = lease payment − interest, so ROU asset and liability stay equal throughout.
- Income statement: a single lease expense (an operating expense) equal to the payment, flat each year.
- Cash flows: the entire payment is an operating outflow.
- Versus a finance lease: lower EBITDA margin, lower asset turnover (in early years) and lower cash flow from operations.
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