This article was originally published in February 2022 and has been updated.
A guide to lease accounting under ASC 842 assists middle-market lessees and lessors in applying the lease guidance in Topic 842, Leases, of the Financial Accounting Standards Board’s Accounting Standards Codification (ASC).
Our comprehensive guide includes in-depth discussion and numerous examples on:
- The scope of ASC 842, whether a contract is within the scope of ASC 842 and the definition of a lease
- The steps entities should take in identifying the units of account present in a contract that includes a lease and allocating the contract consideration to those units of account
- The determination of whether the lease and non-lease components should be treated as separate units of account
- The key inputs used by entities in classifying and accounting for a lease, including the commencement date, the discount rate, the lease term and lease payments
- The lease classification criteria used by entities to classify a lease under ASC 842
- The application of the appropriate accounting model in ASC 842 to the lease (which depends on its classification)
- The initial and subsequent accounting by lessees for operating leases and finance leases, including specific issues such as evaluating right-of-use assets for impairment, applying ASC 842 to leases denominated in a foreign currency and recognizing leases acquired in business combinations and asset acquisitions
- The initial and subsequent accounting by lessors for sales-type leases, direct financing leases and operating leases
- The seller-lessee’s evaluation of and accounting for sale-leaseback transactions
- The entity’s presentation of leases on its balance sheet, income statement and cash flows statement and the disclosures required of lessees and lessors under ASC 842
- The effective date of ASC 842 and the transition guidance that should be applied in the initial implementation of ASC 842
We also shine spotlights throughout our guide on a variety of middle market insights regarding ASC 842. In addition, we provide: (a) an easy-to-use table that summarizes the reassessment and remeasurement events that require reassessment or remeasurement of a particular aspect of ASC 842 (e.g., reassess lease classification or remeasure lease payments) and (b) a disclosure checklist.
The November 2024 edition of this guide has been updated for the following:
- Added discussion of
- Terminal rental adjustment clauses (see Section 5.3.4.2)
- Modifications that grant additional rights of use and make additional changes (see Section 8.2.5.6)
- Short payments by a lessee (see Section 8.2.5.7)
- Modifications that decrease the lessee’s right of use (see Section 8.2.5.8)
- Sale of future operating lease payments that do not meet the definition of a receivable (see Section 9.2.6)
- Lessor accounting for short payments by a lessee (see Section 9.2.10)
- Updated our position regarding the classification of a lease acquired in an asset acquisition transaction (see Section 8.8.1)
- Expanded our discussion of the presentation of lease activity in the cash flow statement (see Sections 11.3 and 12.3)
- Other minor updates and clarifications
Our guide is a valuable tool for entities as they apply the guidance in ASC 842 and account for their leases on a going-forward basis.
