ASC 842 — Leases
Operating / finance- Issued by
- Financial Accounting Standards Board (FASB)
- Jurisdiction
- United States (US GAAP)
- Effective
- Public companies: fiscal years beginning after Dec 15, 2018. Private companies: fiscal years beginning after Dec 15, 2021.
ASC 842 is the US GAAP leasing standard. It requires a lessee to recognise a right-of-use (ROU) asset and a lease liability on the balance sheet for virtually every lease longer than 12 months. Leases are still split into operating and finance leases, which are measured the same way at commencement but expensed differently over the term.
Read the standard at its source: Financial Accounting Standards Board (FASB).
Measurement, classification & disclosure
Recognise a right-of-use asset and lease liability
At the commencement date, a lessee measures the lease liability at the present value of the lease payments not yet paid, discounted using the rate implicit in the lease or, if that is not readily determinable, the lessee's incremental borrowing rate. The ROU asset equals that liability plus any lease payments made at or before commencement and initial direct costs, less lease incentives received.
Cite: ASC 842-20-30-1 and ASC 842-20-30-5
Two classifications, five criteria
A lease is a finance lease if any of five criteria are met: (a) ownership transfers, (b) a purchase option is reasonably certain to be exercised, (c) the term is for a major part of the asset's remaining economic life, (d) the present value of payments is substantially all of the asset's fair value, or (e) the asset is so specialized it has no alternative use. Otherwise it is an operating lease.
Cite: ASC 842-10-25-2
Operating lease: straight-line expense
For an operating lease the lessee recognises a single lease cost on a straight-line basis over the lease term. The lease liability accretes interest and the ROU asset amortizes as the difference between the straight-line cost and that interest, so total expense stays level.
Cite: ASC 842-20-25-6
Finance lease: interest plus amortization
For a finance lease the lessee recognises interest on the lease liability and amortization of the ROU asset separately. Amortization is usually straight-line while interest is front-loaded, so total expense is higher in the early years.
Cite: ASC 842-20-25-5 through 25-7
Disclosures
Lessees disclose the weighted-average remaining lease term, the weighted-average discount rate, total lease cost, and a maturity analysis of the undiscounted lease liabilities reconciling to the recognised liability.
Cite: ASC 842-20-50
Short-term lease exemption
A lessee may elect, by class of underlying asset, not to recognise ROU assets and lease liabilities for leases with a term of 12 months or less that contain no reasonably-certain purchase option.
Cite: ASC 842-20-25-2
Apply ASC 842 to a real lease
Enter a lease in the free calculator with ASC 842 selected. Ledgerage applies the correct lessee model and returns the schedule, journal entries and disclosures — with a citation on every result.
ASC 842 questions, answered
Does ASC 842 still have a 75% and 90% bright line?
ASC 842 removed the explicit ASC 840 bright lines, but 'major part' of economic life and 'substantially all' of fair value are still commonly applied at roughly 75% and 90%, and most companies retain those thresholds as an accounting policy.
What discount rate do I use under ASC 842?
Use the rate implicit in the lease if it is readily determinable; otherwise use your incremental borrowing rate. Non-public business entities may elect to use a risk-free rate, and since ASU 2021-09 that election can be made by class of underlying asset rather than for the whole entity. Public business entities cannot use the risk-free-rate expedient.
The other standards
IFRS 16 is the international leasing standard. Unlike US GAAP it uses a single lessee accounting model: almost every lease is reco…
Read the guide →GASB 87 is the leasing standard for US state and local governments. Like IFRS 16 it uses a single model: a lessee recognises a lea…
Read the guide →