Operating lease - Curriculum mistake

Hi everybody,

I jsut finished the practice problems of the reading 28 non current liabilities.

I was quite confused by the answer of the question 21: “An operating lease is not recorded on the balance sheet (debt is lower), and lease payments are entirely categorised as rent (interest expense is lower.)”

I thought that under US GAAP and IFRS, all lease were now recorded in your liabilities (fact confirmed in the reading and in the exhibit 2). If I am wrong, could someone explain me?

Thanks a lot!

Is this in the 2019 curriculum, or the 2020 curriculum?

Hi S2000magician,

first of all, thanks for helping!

it is in the 2020 curriculum, that’s why I find it disturbing.

In the same practice problems list, Q.30 "which of the following best describes reporting and disclosure requirements for a company that enters into an operating lease as a lessee? A - reported as a receivable on the B/S

B- disclosed in notes to the financial statements

C- reported as a component of debt on the B/S

I would expect the answer to be C but according to the solutions, the correct answer is B despite the US GAAP and the IFRS requiring operating lease to appear in B/S.

I am quite confused right now

For operating lease, you have 02 accounting treatment, generally

  1. Treat the same as finance lease (in IFRS), treat the same like finance lease with regard the asset and liabilities, but only 1 single line - rental expense in IS (USGAAP)
  2. For operating lease < 12 months or with low value, leasees are allowed to recorded no asset and liabilities, only actual rent expense to to Income statement.

Somehow, the curriculum is still right if the latter treatment were mentioned. However, i agree that its quite confusing if they do not make clear about the operating lease’s terms and value

Get confused no more.
This is an erratum from CFAI.

Question 21 (p. 525 of print) should be replaced with “Compared to using a finance
lease with a term longer than one year, a lessee that makes use of an operating lease
will most likely report lower: A. debt. / B. rent expense. / C. interest expense.
Solution: C is correct. A lessee with an operating lease reports rent expense but no
interest expense related to the lease, while a lessee with a finance lease will report
interest expense but no rent expense. Thus, the operating lease will result in lower
interest expense and higher rent expense compared to a finance lease. Both
operating and finance leases require the recognition of a lease liability, so debt
should be the same in both cases.

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It looks like you are misunderstanding Assets and liabilities: operating lease as lessee you do not show an asset but a liabilities, and you only show a rent payment (no rent interest nor depreciation). on the oher hand, as a lessee under finance lease, you would show an asset at amortized cost, a liability (amortized by principal amount), and a inrest expense and depreciation in the IS