What Businesses Need to Know About ASC 842 for Leases

If your business leases equipment or other assets, it's important to make sure they're properly reported in your financial statements.

With the Financial Accounting Standards Board (FASB) rolling out new rules for how leases should show up on balance sheets, you and your accounting team should be aware of a few key changes before moving ahead.

What is ASC 842?

ASC 842 is the new lease accounting standard that affects both companies that lease assets and lessors who rent out assets to other businesses. It replaces the old standard, ASC 840, and is designed to bring more transparency to financial reporting.

Under ASC 842, companies now need to recognize both operating and finance leases as right-of-use (ROU) assets directly on the balance sheet. In the past, these leases were often only mentioned in the footnotes. This change gives a clearer picture of a company’s financial obligations.

The new standard also includes stricter rules for how leases are classified and what information must be disclosed.

Accounting for ASC 842 in Your Business

These changes mean that any business leasing assets needs to take a fresh look at its financial reporting and accounting processes. As your team navigates this shift, here are a few key points to keep in mind.

1. Assess and Pinpoint Your Leases

First, review your company’s financial statements and contracts to identify all leases that need to be reported under ASC 842. The standard defines a lease as “a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.”

Common examples of leases in business may include:

• Office space
• Vehicles
• Operating equipment
• Commercial printers and copiers

It's also worth noting that ASC 842 includes a practical exemption: leases with terms of 12 months or less generally do not need to be recognized on the balance sheet.

2. Consider Lease Type (Operating or Finance)

Another key step is correctly classifying leases as either operating or finance leases:

• Operating leases - allow a business to use an asset for a set period—usually shorter than the asset’s full useful life—with no transfer of ownership at the end of the lease.
• Finance leases - typically involve a transfer of ownership by the end of the term, and the lease often covers most of the asset’s useful life.
  
  

 3. Choose a Transition Method

In addition to classifying leases as operating or finance, businesses adopting ASC 842 must also choose a transition method that best fits their reporting needs. The comparative method involves retroactively adjusting prior financial statements to reflect the new lease accounting rules, while the effective date method applies ASC 842 prospectively, without restating previous years. The choice between these methods depends on factors like reporting objectives, resource availability, and the desired level of comparability across periods.

4. Make Calculations (Or Use Automated Software)

Once you’ve picked a transition method for ASC 842, the next key step is figuring out the discount rate your company will use to calculate the lease liabilities. You can do this by either determining your company’s incremental borrowing rate or by using the applicable federal rate.

After that, your accounting team can start crunching the numbers for reporting. You can handle these calculations manually, but if your company has a bunch of leases or different lease types to manage, it’s usually smarter to use accounting software. It’ll automate the process and save your team a lot of time.

Now, just because your lease disclosures show up on the balance sheet, it doesn’t mean you can skip mentioning them in the footnotes. That’s a common misconception.

Footnotes still play a big role—they provide extra details and context about how the leases are reported.

So, your finance team might still need to include stuff like lease classifications, explanations of important terms, and any special lease conditions in those footnotes.

The Bottom Line

Adjusting to the new ASC 842 reporting standards will probably come with a bit of a learning curve for most accounting teams. But once everything’s in place, these standards will help businesses show a clearer picture of how leases impact their balance sheets. Keeping these tips and steps in mind as your team gets up to speed can really set your business up for success.

If you’re looking for more hands-on guidance with adopting ASC 842, working with a professional could be a smart next move.

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