The ASC 842 Lease Accounting Standard, also known as Accounting Standards Update (ASU) No. 2016-02, is a set of guidelines established by the Financial Accounting Standards Board (FASB) for accounting for leases. The standard went into effect for public companies in 2019, and for private companies in 2020.
The main goal of ASC 842 is to provide more transparency and comparability in financial reporting by requiring companies to recognize leases on their balance sheets. Under the previous lease accounting standard, ASC 840, leases were classified as either operating or finance leases, with only finance leases appearing on the balance sheet. ASC 842 eliminates this distinction, and requires all leases to be recorded on the balance sheet as assets and liabilities.
This new standard requires companies to re-evaluate their leases and determine whether they are considered a “right-of-use” (ROU) asset and lease liability, and to reflect these on their balance sheet. This will bring more visibility to the long-term obligations a company has as a lessee and will give a clearer picture of a company’s overall debt and assets. The standard also requires companies to disclose additional information about their leases in their financial statements, including the total lease payments, the lease term, and the present value of the lease liability.
The transition to ASC 842 has required significant effort from companies, especially those with complex lease arrangements. Many have had to invest in new systems and processes to comply with the standard, and have had to re-evaluate their lease portfolio and make necessary adjustments.
Overall, ASC 842 aims to provide more accurate and transparent financial reporting for leases, and helps to provide investors and other stakeholders with a clearer picture of a company’s financial position. The standard will continue to be an important area of focus for companies, as they work to fully comply with the new requirements and adapt to the changes in their financial reporting.