Lesson 3 of 7 · 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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