What accounting policy election can lessees make regarding leases with a term of 12 months or less?

• A. Lessee must recognize the ROU assets and lease liabilities
• B. Lessee can choose not to recognize ROU assets or lease liabilities
• C. Lessee can only record cash transactions related to the lease
• D. Lessee is required to capitalize all lease payments

Answer: (B)

Lessees have the option to elect not to recognize right-of-use (ROU) assets or lease liabilities for leases with a term of 12 months or less. This election provides some relief for lessees, allowing them to simplify their accounting for short-term leases. It streamlines the reporting process by enabling lessees to charge lease payments to expense on a straight-line basis over the lease term, without the need to adjust their balance sheet for ROU assets and associated liabilities.

This election aligns with the intention to reduce the burden of lease accounting for businesses that enter into short-term agreements, which may not significantly affect their financial position. Therefore, this choice is particularly beneficial for small businesses or entities that may engage in numerous short-term rental agreements.

The other available options do not reflect this policy choice. The requirement to recognize ROU assets and lease liabilities applies specifically to leases over 12 months, while recording only cash transactions does not provide a complete picture of leasing activities and their associated financial impacts. Capitalizing all lease payments would contradict the relief provided by the short-term lease election, as it would mean recognizing lease-related assets and liabilities on the balance sheet.