Under ASC 842 and IFRS 16, how are leases classified in Workday?

Under ASC 842 and IFRS 16, leases are classified as either operating or finance leases. This classification is essential because it reflects how the lease should be accounted for in financial statements. Under these accounting standards, organizations need to recognize lease liabilities and right-of-use assets on their balance sheets for both operating and finance leases.

The classification helps distinguish between leases that provide a significant portion of the benefits of asset ownership (finance leases) and those that do not (operating leases). This is important for investors and stakeholders as it affects key financial metrics and provides transparency regarding the organizational obligations related to leases.

The other options do not align with the requirements set out by ASC 842 and IFRS 16. For example, classifying leases as only capital leases or as prepaid expenses does not adequately encapsulate the new lease accounting model. Similarly, treating leases as fully expensed in the year incurred does not comply with the principles of recognizing them as assets and liabilities on the balance sheet, which is the foundation of the accounting changes introduced by these standards.