Converting IFRS to US GAAP for operating leases involves:

Converting IFRS to US GAAP for operating leases involves:

• A. IS: Identify depreciation and interest on operating leases and move to operating costs; BS: Operating lease element of debt and treat as regular liability
• B. IS: Capitalize all leases; BS: Record as asset only
• C. IS: Leave lease as is; BS: Remove lease liabilities
• D. IS: Increase rent expense; BS: Record as cash flow only

Answer: (A)

The main idea is that under US GAAP ASC 842, operating leases are recorded on the balance sheet as a right-of-use asset and a lease liability that behaves like debt. On the income statement, the lease is shown as a single operating expense that runs straight-line over the lease term, which effectively combines depreciation of the right-of-use asset and interest on the lease liability into one cost line. When converting from IFRS, you reclassify the IFRS depreciation and interest into this operating lease expense and recognize the lease liability as a debt-like obligation on the balance sheet. This is why the described approach—moving depreciation and interest into operating costs and treating the lease element as regular debt on the balance sheet—best matches US GAAP presentation. The other options fail because they misstate how the lease is shown on the balance sheet and income statement under ASC 842 (for example, not recognizing a liability, or capitalizing all leases with asset-only recording, or treating rent as cash-flow only).

The main idea is that under US GAAP ASC 842, operating leases are recorded on the balance sheet as a right-of-use asset and a lease liability that behaves like debt. On the income statement, the lease is shown as a single operating expense that runs straight-line over the lease term, which effectively combines depreciation of the right-of-use asset and interest on the lease liability into one cost line. When converting from IFRS, you reclassify the IFRS depreciation and interest into this operating lease expense and recognize the lease liability as a debt-like obligation on the balance sheet. This is why the described approach—moving depreciation and interest into operating costs and treating the lease element as regular debt on the balance sheet—best matches US GAAP presentation. The other options fail because they misstate how the lease is shown on the balance sheet and income statement under ASC 842 (for example, not recognizing a liability, or capitalizing all leases with asset-only recording, or treating rent as cash-flow only).