How do capital leases differ from operating leases in healthcare financial reporting under current standards?

• A. Operating leases are recorded as assets and liabilities on the balance sheet.
• B. Capital leases are recorded as both assets and liabilities on the balance sheet with depreciation and interest.
• C. Leases do not affect financial statements under current standards.
• D. Operating leases are expensed and do not appear as assets/liabilities under older standards.

Answer: (B)

Under current standards, leases are classified as finance (capital) or operating. A finance/capital lease is treated like a financed purchase: the lessee records a right‑of‑use asset and a lease liability on the balance sheet, and over time the asset is depreciated while the lease liability accrues interest. The income statement shows depreciation expense for the asset and interest expense on the liability. This combination—having both an asset and a liability on the balance sheet with depreciation and interest costs—is why that option is the best representation of capital leases.

Operating leases under current rules also appear on the balance sheet as a right-of-use asset and a lease liability, but the income statement generally reports a single straight‑line lease expense rather than separate depreciation and interest.