Introduction to ASC 842

ASC 842, or Accounting Standards Codification 842, is a set of accounting standards issued by the Financial Accounting Standards Board (FASB). It provides guidance on how to account for leases, ensuring that companies accurately report their lease obligations and related expenses on their financial statements.

What is ASC 842?

ASC 842 is the new lease accounting standard that replaced ASC 840. It requires lessees to recognize most leases on their balance sheets as right-of-use (ROU) assets and lease liabilities. This change was made to increase transparency and provide users of financial statements with a more accurate representation of a company's financial position.

Types of Leases Under ASC 842

ASC 842 categorizes leases into two types: operating leases and finance leases.

Operating Leases

Operating leases are leases in which the lessee does not transfer control of the underlying asset to the lessor. The lessee records lease expenses on a straight-line basis over the lease term.

Finance Leases

Finance leases, on the other hand, are leases in which the lessee does transfer control of the underlying asset to the lessor. The lessee records both a ROU asset and a lease liability on their balance sheet.

ASC 842 Journal Entries

ASC 842 introduces new journal entries to record lease transactions. These entries depend on the type of lease and can include initial recognition, subsequent recognition, and other adjustments.

Journal Entry for Operating Leases

For operating leases, the lessee records a debit to Lease Expense and a credit to Cash or Accounts Payable, depending on the payment terms.

Journal Entry for Finance Leases

For finance leases, the lessee records a debit to ROU Asset and a credit to Lease Liability.

Recording ASC 842 Journal Entries

To record ASC 842 journal entries, companies need to have a system in place that can accurately track lease transactions and generate the necessary journal entries. Lease accounting software, like LeaseCrunch, can simplify this process and ensure compliance with ASC 842.

Sale-Leaseback Transactions and Lease Incentives

ASC 842 also provides guidance on accounting for sale-leaseback transactions and lease incentives. Sale-leaseback transactions involve selling an asset and then leasing it back from the buyer. Lease incentives are payments or other benefits provided by the lessor to the lessee as an inducement to enter into a lease agreement.

Equity Impact Under ASC 842

ASC 842 may have an impact on a company's equity. The recognition of lease liabilities and ROU assets on the balance sheet can affect financial ratios and key performance indicators. It is important for companies to carefully consider the equity implications of adopting ASC 842.

Accounting under GASB 87 and GASB 96

While ASC 842 applies to private companies, the Governmental Accounting Standards Board (GASB) has also issued lease accounting standards for state and local governments. GASB 87 and GASB 96 provide guidance on how government entities should account for leases.

Eliminating Lease Accounting Errors

ASC 842 aims to improve the accuracy of lease accounting and reduce errors. By implementing proper lease accounting procedures and utilizing lease accounting software, companies can eliminate lease accounting errors and ensure compliance with ASC 842.

Conclusion

ASC 842 is a comprehensive accounting standard that provides guidance on how to account for leases. It introduces new journal entries, categorizes leases into operating and finance leases, and requires the recognition of lease liabilities and ROU assets on the balance sheet. Companies should carefully consider the implications of ASC 842 and implement the necessary systems and procedures to ensure compliance.