Under ASC 842, how are leases classified?

Under ASC 842, leases are classified as operating leases or finance leases. This classification is crucial because it impacts how leases are reported on the balance sheet and income statement.

In the context of financial reporting, finance leases and operating leases have different recognition, measurement, and disclosure requirements. Finance leases are treated more similarly to purchasing the underlying asset, meaning the lessee recognizes both the asset and a liability for the lease payments on their balance sheet. Conversely, for operating leases, while assets and liabilities are also recognized, the expense is recognized on a straight-line basis over the lease term, impacting the presentation in the income statement differently.

This classification aligns with the overall aim of ASC 842, which seeks to provide a more accurate representation of a company's lease obligations and the related assets on their financial statements, enhancing transparency for stakeholders. The other classifications mentioned in the choices do not align with ASC 842's framework, as the focus is solely on distinguishing between operating and finance leases based on the contractual terms and the degree of asset ownership effectively transferred to the lessee.