Lease Accounting Guide

ASC 842 is a new lease accounting standard that requires companies to record both operating and finance leases on their balance sheets, increasing transparency and providing a clearer picture of financial obligations.

ASC 842 affects all organizations that enter into lease agreements, including large publicly traded companies and small private businesses. By the end of 2021, all these entities must comply with the new standards, which require them to report right-of-use (ROU) assets and lease liabilities for nearly all leases.

Under ASC 842, companies must recognize lease liabilities and right-of-use assets, which impacts financial statements by including previously off-balance-sheet leases.

Best practices include ensuring alignment among stakeholders, developing improved lease management processes, partnering with the right software solutions, and establishing sustainable practices for ongoing compliance.

Under ASC 842, a lease is recorded at commencement by debiting the Right-of-Use Asset and crediting the Lease Liability for the present value of future lease payments. Each period, the lease liability is reduced by the principal portion of the payment, interest expense is recognized, and straight-line rent expense is recorded against the ROU asset. For finance leases, amortization and interest expense are recorded separately, front-loading total expense over the lease term. Journal entries will vary based on lease incentives, initial direct costs, prepaid rent, and any lease modifications.