Which standards do operating leases follow under new accounting principles?

Under the new accounting principles, particularly those dictated by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), operating leases are now required to be recognized on the balance sheet. This change represents a significant shift from previous accounting standards where operating leases were typically kept off the balance sheet.

When an entity enters into an operating lease, it must recognize a right-of-use asset and a corresponding lease liability on its balance sheet. This ensures that the financial statements provide a more accurate picture of the company's financial commitments and resources. The right-of-use asset represents the lessee's right to use the leased asset during the lease term, while the lease liability reflects the obligation to make lease payments over time.

This full recognition contrasts with earlier practices where operating leases might have only been disclosed in footnotes, without impacting reported assets and liabilities, or showed no recognition at all. The goal of these new standards is to increase transparency and comparability for users of financial statements, allowing stakeholders to better evaluate a company’s leverage and operational capabilities.