A Comprehensive Guide to Accounting Standards Codification 842

Accounting standards play a crucial role in maintaining transparency and ensuring accurate financial reporting. In this guide, we will explore the Accounting Standards Codification 842 (ASC 842), specifically focusing on lease accounting. ASC 842 introduces significant changes to lease accounting practices, and it is essential for organizations to understand and implement these changes effectively.

What is ASC 842?

ASC 842 is a set of accounting standards issued by the Financial Accounting Standards Board (FASB) that governs the recognition, measurement, presentation, and disclosure of leases. It replaces the previous lease accounting standard, ASC 840, and aims to improve transparency and comparability in financial statements.

What are the Two Types of Leases Under ASC 842?

ASC 842 identifies two types of leases: operating leases and finance leases. Operating leases are similar to rental agreements, where the lessee uses an asset for a specific period without transferring ownership. Finance leases, on the other hand, involve the transfer of ownership at the end of the lease term.

What are the ASC 842 Journal Entries?

ASC 842 requires specific journal entries to record lease transactions accurately. These journal entries include initial recognition, subsequent recognition, and other entries related to lease incentives, sale-leaseback transactions, and more. Properly recording these journal entries is crucial for ensuring compliance with ASC 842.

What is the ASC 842 Journal Entry for Operating Leases?

The ASC 842 journal entry for operating leases involves recognizing the right-of-use asset and lease liability on the balance sheet. The lessee amortizes the right-of-use asset and records periodic lease expense over the lease term.

What is the ASC 842 Journal Entry for Finance Leases?

For finance leases, the ASC 842 journal entry includes recognizing both the right-of-use asset and lease liability on the balance sheet. Additionally, the lessee records interest expense on the lease liability and amortizes the right-of-use asset over the lease term.

How Do You Record an ASC 842 Journal Entry for a Lease?

Recording an ASC 842 journal entry for a lease involves several steps. It requires identifying the lease term, determining the lease payments, calculating the present value of the lease payments, and recording the appropriate entries on the balance sheet and income statement.

How Do You Account for Sale-Leaseback Transactions?

ASC 842 provides specific guidance on accounting for sale-leaseback transactions. In a sale-leaseback transaction, the seller transfers an asset to the buyer and leases it back. The seller-lessee records a gain or loss on the sale and recognizes a right-of-use asset and lease liability.

How Do You Account for Lease Incentives?

Lease incentives, such as rent-free periods or tenant improvement allowances, require special accounting treatment under ASC 842. The lessee amortizes the lease incentives over the lease term, reducing the total lease expense.

Is Equity Affected Under ASC 842?

ASC 842 may have an impact on equity due to the recognition of right-of-use assets and lease liabilities on the balance sheet. Lessees should carefully analyze the effect of lease accounting changes on their equity position.

Accounting under GASB 87 and GASB 96

While ASC 842 focuses on lease accounting for private entities, the Governmental Accounting Standards Board (GASB) has also issued standards for lease accounting in the public sector. GASB 87 and GASB 96 provide guidance on lease accounting for state and local governments.

Eliminate Lease Accounting Errors

To ensure accurate lease accounting and eliminate errors, organizations can leverage technology solutions like LeaseCrunch. LeaseCrunch offers a comprehensive guide to ASC 842 journal entries, lease accounting automation, and a white-glove experience to optimize lease accounting processes.

Conclusion

Accounting Standards Codification 842 (ASC 842) introduces significant changes to lease accounting practices. It is crucial for organizations to understand and implement these changes accurately to ensure compliance and transparency in financial reporting. By following the ASC 842 journal entries and leveraging technology solutions like LeaseCrunch, organizations can streamline their lease accounting processes and eliminate errors.