What is a lease liability?
A lease lets a company use an asset it does not own, such as a store or a data center. In return, it pays regularly for a set period.
The FASB writes US accounting rules. It says leasing can be a way to use an asset, to get financing, or both.[S1]
Under its lease rule, Topic 842, a company that leases records two things on its balance sheet. One is a right-of-use asset: its right to use the asset for the lease term.[S1]
The other is a lease liability: the payments it still owes, at their present value. Present value means future payments are discounted, because a dollar paid later counts for less today.[S1]
How is an operating lease different from a finance lease?
Topic 842 keeps two kinds of lease.
Both put an asset and a liability on the balance sheet. They differ in how the cost and cash show up.[S1]
- Finance lease. Interest on the liability and amortization (the gradual write-down) of the asset are recorded separately. Repayments of the liability go in financing activities in the cash flow statement; interest goes in operating activities.[S1]
- Operating lease. The company records one lease cost, spread evenly over the lease term. All its cash payments go in operating activities.[S1]
What did Topic 842 change?
Before Topic 842, US rules did not require companies to put operating leases on the balance sheet. The FASB wrote that previous GAAP did not require lease assets and liabilities for most leases.[S1]
For public companies, the rule took effect for fiscal years beginning after Dec 15, 2018, including the quarters within them.[S1]
Why are lease liabilities easy to miss?
- They are not called debt. Topic 842 asks for lease liabilities to be shown or disclosed separately from other liabilities.[S1] So a company's debt lines, and a net debt figure built on them, often leave leases out.
- They can sit inside "other" lines. A company may fold lease liabilities into wider balance sheet lines. If it does, its notes must say which lines hold them.[S1]
- The cost does not look like interest. An operating lease shows one lease cost within operating results, not as interest expense.[S1]
- The cash lands in different places. Finance lease repayments sit in financing activities.[S1] So free cash flow worked out as operating cash flow minus capital spending does not subtract them.
- Some companies' own measures do. Meta's own free cash flow also subtracts principal payments on finance leases.[S3]
- Signed leases may not be on the balance sheet yet. The liability is recorded at the commencement date, when the lease starts.[S1] Leases signed but not started are described in the notes when they create significant rights and obligations.[S1]
- Short leases can be left off. A company may choose not to record leases of 12 months or less.[S1]
Where do you find leases in a 10-K or 10-Q?
Look for the lease note among the notes to the financial statements. Topic 842 sets out what it must contain.[S1]
- The lease cost for each period: finance lease amortization and interest, operating lease cost, short-term and variable lease costs.
- Cash paid on leases, split between operating and financing cash flows.
- The weighted average remaining lease term and discount rate.
- A maturity table: the undiscounted payments due in each of the next five years and in total after that. It is reconciled to the liabilities on the balance sheet.
- Leases signed but not yet started, when they create significant rights and obligations.
For where the notes sit in an annual report, see how to read a 10-K.
What does a real lease note look like?
Microsoft filed its 10-Q for the quarter ended Sep 30, 2026 on Oct 28, 2026. That quarter is the first of its fiscal 2027.[S2]
In the filing · Balance sheets, Sep 30, 2026 (page 5)
Current portion of long-term debt; Long-term debt $4,391 million; $31,090 million[S2]
In the filing · Balance sheets, Sep 30, 2026 (page 5)
Operating lease liabilities $21,719 million[S2]
In the filing · Note 12, Leases, supplemental balance sheet information (page 22)
Total finance lease liabilities $70,973 million[S2]
In the filing · Note 12, maturities of lease liabilities (page 22)
Total lease payments (finance leases) $95,246 million[S2]
In the filing · Note 12, Leases (page 22)
Leases that had not yet commenced $364.6 billion[S2]
Added together, Microsoft's lease liabilities were $98,450 million at Sep 30, 2026 (Cityfort calculation). Its debt lines came to $35,481 million.[S2]
In the quarter, it paid $1,547 million on operating leases within operating cash flows. It also paid $1,000 million on finance leases within financing cash flows.[S2]
How does Cityfort show leases?
Cityfort stock pages count borrowings as debt. Many pages' debt notes say whether lease liabilities are in or out.
The Microsoft, Apple and Costco pages leave lease liabilities out of debt and say so. The Meta page leaves operating lease liabilities out of debt and says so; its debt counts only Meta's notes. The Tesla page counts finance leases as debt, but not operating leases.
A company's own "net debt" may count leases differently. When it publishes that measure, it is the company's own; see non-GAAP measures.