Operating Leased Assets

Description
The business that leases the asset is called the lessee, and the business that loans it under a lease is called the lessor. The responsibilities of each party in the agreement are spelled out in the lease contract and documents, but generally, the lessee must maintain the asset to ensure it remains in operational condition, less any normal wear and tear.
An operating lease is a contract that permits the use of an asset without transferring the ownership rights of said asset.
A finance lease is a contract that permits the use of an asset and transfers ownership after the lease period is complete, and the lessor meets all other contract obligations.
GAAP rules govern accounting for operating leases.
All leases 12 months and longer must be recognized on the balance sheet.
Leases shorter than 12 months can be recognized as expenses using the straight-line method.
Operating lease accounting changed in 2016 when the Federal Accounting Standards Board released ASC Topic 842, Leases. The new standard provided guidance when accounting for leases, where the lease and the corresponding asset value would be required to be reported on the balance sheet. However, leases for less than 12 months can be recognized as an expense using the straight-line basis method.
When a lease of more than 12 months is initiated, the lessee must account for it as a lease liability and an asset right-of-use on the balance sheet. The intent behind the change is to reduce the ability of organizations to manipulate the balance sheet and create a more faithful representation of a business's rights and obligations.