A guide to lease accounting

Dec 14, 2023
Audit Lease accounting Financial reporting

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 ROU 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 December 2023 edition of this guide has been updated to incorporate guidance from the following Accounting Standards Updates (ASUs) issued by the FASB:

  • ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 (see Section of the guide)
  • ASU 2023-01, Leases (Topic 842): Common Control Arrangements (see Sections 3.1.1 and 10.3.4 of the guide)
  • ASC 326-20, Financial Instruments – Credit Losses – Measured at Amortized Costs (see Sections 7.5, 7A.2.4 and 7A.2.7 of the guide)

This edition also has been updated to add Appendix E: Definitions and to incorporate RSM’s October 2022 Lessor accounting under ASC 842 whitepaper for one comprehensive lease accounting guide.

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. Click here for information about the ASC 842 accounting standards implementation services provided by RSM.

Do you know how to evaluate ASC 842 technology solutions?

ASC 842 represents a significant shift in lease accounting standards and many technology solutions can ease the transition and help organizations remain compliant.

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