Understanding ASC 842 Understanding ASC 842

Understanding ASC 842: A Comprehensive Guide for Businesses

ASC 842 is a new lease accounting standard introduced by the Financial Accounting Standards Board (FASB). This standard has significantly changed the way businesses in the United States account for leases. It aims to increase transparency and comparability among organizations by requiring the recognition of lease assets and liabilities on the balance sheet. Understanding the definition and implications of ASC 842 is crucial for businesses seeking to comply with these updated accounting requirements and accurately represent their financial positions.

What is ASC 842?

ASC 842, also known as Topic 842, is a lease accounting standard that requires lessees to recognize the rights and obligations arising from leases on their balance sheets. This standard applies to all leases with terms longer than 12 months, including operating leases, which were previously off-balance-sheet under the old ASC 840 standard. The primary goal of ASC 842 is to provide a clearer picture of a company’s financial commitments by making lease obligations more transparent. It’s worth looking at an industry written ASC 842 definition too to make sure it sits right in your mind.

Key Components of ASC 842

  1. Right-of-Use Assets: Lessees must recognize a right-of-use (ROU) asset, which represents their right to use the underlying asset for the lease term.
  2. Lease Liabilities: Lessees must also recognize a lease liability, which represents their obligation to make lease payments.
  3. Lease Classification: Leases are classified as either operating or finance leases, with different accounting treatments for each.
  4. Disclosure Requirements: ASC 842 requires enhanced disclosures about the nature and terms of lease agreements, including quantitative and qualitative information.

Comparison Between ASC 840 and ASC 842

Aspect ASC 840 ASC 842
Lease Classification Operating, Capital Operating, Finance
Balance Sheet Impact Capital leases only All leases >12 months
Right-of-Use Asset Not required for operating leases Required for all leases >12 months
Lease Liability Not required for operating leases Required for all leases >12 months
Disclosures Limited Enhanced, more detailed

This table highlights the key differences between ASC 840 and ASC 842, illustrating the increased transparency and comprehensive nature of the new standard.

Importance of ASC 842 for Businesses

Financial Transparency

One of the main objectives of ASC 842 is to improve financial transparency. By bringing almost all leases onto the balance sheet, the standard ensures that investors and other stakeholders have a more accurate understanding of a company’s financial obligations. This transparency is crucial for making informed investment decisions and assessing a company’s overall financial health.

Improved Financial Ratios

Under ASC 842, financial ratios such as debt-to-equity and return on assets may change due to the recognition of additional lease liabilities and right-of-use assets. Businesses need to understand these changes to manage their financial performance effectively. Improved transparency can lead to better credit ratings and more favorable borrowing terms, as lenders have a clearer picture of the company’s liabilities.

Enhanced Decision-Making

ASC 842 provides detailed information about lease agreements, helping businesses make more informed decisions regarding their leasing strategies. Companies can assess the financial impact of their leases more accurately, enabling them to choose between leasing and purchasing assets based on comprehensive financial analysis.

Compliance and Risk Management

Non-compliance with ASC 842 can result in significant penalties and legal issues. Businesses must ensure they adhere to the new standard to avoid these risks. Implementing proper lease accounting processes and systems helps mitigate compliance risks and ensures that financial statements are accurate and reliable.

Implementing ASC 842 in Your Business

Conduct a Lease Inventory

The first step in implementing ASC 842 is conducting a comprehensive inventory of all leases. This includes identifying all lease agreements, gathering relevant data, and classifying leases according to the new standard.

Use Lease Accounting Software

Given the complexity of ASC 842, many businesses are turning to lease accounting software to streamline the compliance process. These accounting software solutions automate data collection, calculation, and reporting, ensuring accuracy and efficiency. They also provide tools for managing lease modifications and renewals, making it easier to maintain compliance over time.

Training and Education

Educating your finance and accounting teams about the requirements and implications of ASC 842 is crucial. Provide training sessions and resources to ensure that everyone involved understands the new standards and how to apply them. This knowledge will help your team accurately implement and maintain compliance with ASC 842.

Regular Reviews and Updates

ASC 842 compliance is an ongoing process. Regularly review and update your lease data and accounting practices to ensure continued compliance. Monitor changes in lease agreements and reassess their impact on your financial statements. Staying proactive in managing your leases will help avoid potential issues and maintain accurate financial reporting.


ASC 842 represents a significant shift in lease accounting, aimed at improving transparency and providing a more accurate picture of a company’s financial commitments. By recognizing right-of-use assets and lease liabilities on the balance sheet, businesses can offer greater insight into their financial health. Implementing ASC 842 requires careful planning, the right tools, and ongoing diligence, but the benefits of enhanced transparency, improved financial ratios, and better decision-making make it a critical standard for businesses operating in the United States. Embracing ASC 842 will not only ensure compliance but also strengthen the overall financial management of your business.