What is the initial treatment of operating leases under US GAAP?

The initial treatment of operating leases under US GAAP is recognized as a liability with an asset on the balance sheet. This reflects a significant shift that occurred with the implementation of Accounting Standards Update (ASU) 2016-02, which amended the way leases are accounted for. Under the new guidance, lessees must recognize a right-of-use (ROU) asset and a lease liability for virtually all leases, including operating leases.

This standard enhances transparency by ensuring that lessees show the obligations associated with their leases on the balance sheet. The ROU asset represents the lessee's right to use the leased property during the lease term, while the lease liability reflects the obligation to make lease payments. This treatment provides a clearer picture of a company's financial position, as it recognizes the economic resources used and the responsibilities incurred, even if the lease does not transfer ownership of the asset to the lessee at the end of the lease term.

The other choices do not align with the current guidance. Simply recording operating leases as expenses would fail to capture the financial obligations associated with them. Not recognizing anything until the end of the lease term would overlook the ongoing obligations and rights in the interim. Lastly, only recording potential cash flows misses the essence of the