ASC 842 stands for Accounting Standards Codification 842, also known as the updated lease accounting standards being implemented by the Financial Accounting Standards Board. ASC 842 affects the way leases are reported under GAAP and introduces the right-of-use model that shifts from the risk and rewards approach to a control-based approach.
USA: Lease accounting standards are changing
What is ASC 842?
Why is the FASB updating lease accounting standards?
Overall, the FASB is updating lease accounting standards to improve clarity in accounting. The new standards will move off balance sheet leasing arrangements, like operating leases, on to the balance sheet which will allow investors and other uses of financial statements to more readily and accurately understand the rights and obligations associated with the leases a company is beholden to. Additionally, the new lease standard will increase transparency and comparability among organizations that lease buildings, equipment, and other assets by recognizing the assets and liabilities that arise from lease transactions.
What are the new lease accounting standards?
This change in compliance isn’t quite as simple as transferring where you’re reporting your leased assets. Previously, there were two ways to classify a lease:View the complete FAQ section on Lease Accounting Standards here >>
- As a “capital” lease, where ownership of the asset transferred to the lessee. Capital leases were recorded on the balance sheet.
- As an “operating” lease, where only the right to use the asset transferred. Operating leases were not included on the balance sheet, but were disclosed in the footnotes of the financial statements.
- Month-to-month leases: Review any current leases you have listed as month-to-month. If the asset is solely used by the lessee and the lessee is guaranteeing the debt by providing the cash flow necessary to service the debt, then a longer lease may be appropriate.
- Related-party leases: Although these leases may be a month-to-month or under 12 month arrangement, depending on the situation, if the arrangement functions more like a longer-term lease, it must be recorded on the balance sheet.
- Job costing: The new lease standards directly affect how you report leases that are alleviating a debt. Accurately capturing your job costs will likely change, depending on what the cash flow of paid leases provide to your business.