What Is ASC 842? A Complete Guide to Lease Accounting
ASC 842 is the lease accounting standard set by the US Financial Accounting Standards Board (FASB). It requires companies that follow US GAAP to record almost every lease longer than 12 months on the balance sheet, as a right-of-use asset and a matching lease liability. That single change reshaped how finance teams account for office space, vehicles, equipment and just about anything else a business rents rather than buys.
Before ASC 842, a huge chunk of corporate leasing simply didn't show up on the balance sheet. Now it does, for lessees and lessors alike. This guide covers what ASC 842 requires at a high level, why it exists, who has to follow it, and when. Each deeper topic — measurement, classification, journal entries, disclosures — links out to a dedicated post if you want the full mechanics.
- ASC 842 is FASB's US GAAP lease standard, effective for public companies from 2019 and private companies from 2022.
- Lessees record a right-of-use asset and a lease liability for almost every lease over 12 months.
- Leases are still classified as operating or finance, but both now sit on the balance sheet.
- ASC 842 replaced ASC 840, which let operating leases stay off-balance-sheet entirely.
- IFRS 16 and GASB 87 are the international and US government equivalents.
Why did FASB introduce ASC 842?
Under the old standard, ASC 840, a lease was either a capital lease or an operating lease. Capital leases went on the balance sheet. Operating leases didn't — they were expensed straight-line and only mentioned in the footnotes. That distinction sounds tidy in theory, but in practice it gave companies a lot of room to structure leases so they landed on the operating side of the line, keeping billions of dollars of long-term commitments invisible to anyone reading the balance sheet.
Investors and analysts had been asking FASB to fix this for years. Off-balance-sheet operating leases made it hard to compare a company that owned its buildings and equipment with one that leased everything, even if the two businesses were economically identical. FASB issued ASU 2016-02, which created ASC 842, on 25 February 2016 to close that gap.
A FASB Vice Chairman put the rationale plainly at the time:
Who does ASC 842 apply to, and when?
ASC 842 applies to any entity that reports under US GAAP and leases assets, whether as a lessee or a lessor — public companies, private companies, and not-for-profits. It covers most leases of property and equipment with a term longer than 12 months. Government entities in the US follow a separate but similar standard, GASB 87, rather than ASC 842.
Public companies had to adopt ASC 842 for fiscal years beginning after 15 December 2018. Private companies and not-for-profits got a longer runway, adopting for fiscal years beginning after 15 December 2021. If a lease runs 12 months or less and doesn't include a purchase option you're reasonably certain to exercise, you can elect the short-term lease exemption and keep expensing it the old way instead.
How do you measure a lease under ASC 842?
Measurement happens in two steps, and the order matters: you calculate the lease liability first, then use it to calculate the right-of-use asset.
The lease liability is the present value of the payments you still owe, discounted at the rate implicit in the lease if you can determine it, or otherwise your incremental borrowing rate. Picking the right discount rate matters — a small change in rate can shift the liability, and therefore the asset, by a meaningful amount over a multi-year lease.
Once you have the liability, the right-of-use asset is built from it: the initial lease liability, plus any prepaid rent and initial direct costs, minus any lease incentive the landlord gave you. Say a logistics company signs a five-year lease for a warehouse and a fleet of forklifts. On day one, its finance team discounts the future rent payments to work out the liability, adds the cost of negotiating the lease, subtracts the two months' free rent the landlord threw in, and that final number becomes the right-of-use asset sitting on the balance sheet. Every month after that, both the liability and the asset roll forward on their own schedules until the lease ends. For the full walk-through with formulas and a worked example, see how to calculate the right-of-use asset and lease liability.
Is the lease operating or finance?
ASC 842 kept the operating-versus-finance distinction from the old standard, even though both types now appear on the balance sheet. A lease is a finance lease if it meets any one of five criteria: ownership transfers to the lessee by the end of the term, there's a purchase option the lessee is reasonably certain to exercise, the lease term covers the major part of the asset's remaining economic life, the present value of payments amounts to substantially all of the asset's fair value, or the asset is so specialised it has no alternative use to the lessor once the lease ends. Meet none of those, and it's an operating lease.
The classification still matters because it changes how the expense hits the income statement. Operating leases produce a single, level lease cost each period. Finance leases split the cost into interest and amortisation, which front-loads the expense early in the lease term. For the full criteria and worked comparisons, read operating vs finance lease under ASC 842 or browse the operating vs finance lease glossary entry.
What journal entries does ASC 842 require?
At commencement, both lease types record the same basic entry: debit right-of-use asset, credit lease liability, for the amounts calculated above. What happens afterwards depends on classification. An operating lease recognises one straight-line lease expense each period, with the liability and asset adjusting behind the scenes to keep the expense level. A finance lease instead recognises interest expense on the liability using the effective-interest method, plus separate straight-line amortisation of the asset — two line items instead of one, and a higher combined expense in the early years. If you want the full set of entries with real numbers, ASC 842 journal entries: a worked example walks through commencement, monthly postings, and the final entry that closes out the lease.
What does ASC 842 require you to disclose?
ASC 842 also expanded what companies have to disclose in the footnotes, not just what goes on the face of the balance sheet. That includes a breakdown of lease costs by type, weighted-average discount rates and remaining lease terms, a maturity analysis of undiscounted future lease payments, and qualitative information about significant leases and the judgements used to classify and measure them. The goal, again, is comparability: a reader should be able to look at the disclosures and understand roughly what a company has committed to, even without digging into every individual lease. For the specific line items and sample disclosure language, see ASC 842 disclosure requirements, with examples.
Try it on your own lease
ASC 842 is a lot of moving parts for what is, underneath it all, a present-value calculation and a couple of allocation rules. The fastest way to see how it fits together is to run one real lease through it. The free calculator builds the right-of-use asset, lease liability, full amortisation schedule and journal entries for a single lease in a few minutes, so you can check your own numbers or just see the mechanics in action before you tackle a whole portfolio.
“It's pretty easy to say it's a win for financial reporting when you increase both transparency and comparability of one of the largest—if not the largest—source of current off-balance-sheet financing.”
| Item | Detail |
|---|---|
| Issuer | Financial Accounting Standards Board (FASB), as ASU 2016-02 |
| Issued | 25 February 2016 |
| Applies to | Any entity reporting under US GAAP that leases assets as a lessee or lessor |
| Effective date (public companies) | Fiscal years beginning after 15 December 2018 |
| Effective date (private companies and NFPs) | Fiscal years beginning after 15 December 2021 |
| Core requirement | Recognise a right-of-use asset and a lease liability for leases longer than 12 months |
| Lessee classifications | Operating lease or finance lease |
| Predecessor standard | ASC 840, which allowed operating leases to stay off the balance sheet |
Frequently asked questions
When did ASC 842 become effective for private companies?
Private companies and not-for-profits had to apply ASC 842 for fiscal years beginning after 15 December 2021, three years later than public companies. That gap gave private-company finance teams extra time to inventory leases and build an amortisation schedule for each one, though many still scrambled to hit the deadline.
Does ASC 842 apply to short-term leases?
Not if you don't want it to. ASC 842 offers a practical expedient called the short-term lease exemption for leases with a term of 12 months or less and no purchase option a lessee is reasonably certain to exercise. You can elect to keep those off the balance sheet and expense the payments on a straight-line basis instead, much like the old ASC 840 treatment.
What's the difference between ASC 842 and ASC 840?
ASC 840 let companies classify most leases as operating leases and keep them entirely off the balance sheet, disclosed only in the footnotes. ASC 842 closed that gap: almost every lease over 12 months now shows up as an asset and a liability on the balance sheet itself, which is why the transition was such a significant undertaking for finance teams.
Does ASC 842 apply outside the United States?
No. ASC 842 is a US GAAP standard set by FASB, so it only applies to entities reporting under US GAAP. Companies reporting under IFRS follow IFRS 16 instead, and US state and local governments follow GASB 87. All three standards share the same basic idea of putting leases on the balance sheet, but they differ in the details of classification and measurement.
What's the difference between the lease liability and the right-of-use asset?
The lease liability is the present value of the payments you still owe under the lease. The right-of-use asset represents your right to use the underlying asset for the lease term, and it starts out roughly equal to the liability, adjusted for prepayments, incentives and initial direct costs. They're calculated together but they're not identical, and they typically diverge over the life of the lease.
Sources
Compute this lease for real
Free, no account required. Get the right-of-use asset, lease liability, full amortization schedule, journal entries and disclosures — every number cited.