Introduction to Lease Accounting: An overview of lease accounting, its importance, and how it differs from traditional accounting practices.

Lease accounting is a critical aspect of financial reporting that helps companies manage their leases effectively. It is a method of accounting for the rights and obligations associated with the use of leased assets. Lease accounting is an important topic for businesses, as it can have a significant impact on financial statements and other reporting requirements.

In traditional accounting practices, leases were often treated as an off-balance sheet item, which meant that they were not included in financial statements. This approach created a number of issues for businesses, including the potential for inaccurate financial reporting and the risk of non-compliance with regulatory requirements.

In response to these challenges, lease accounting standards have been developed to provide guidance on how leases should be accounted for in financial statements. The most widely used standards are the International Financial Reporting Standards (IFRS) and the Financial Accounting Standards Board (FASB) guidelines.

Under these standards, leases are classified as either operating or finance leases. Operating leases are those where the lessee does not assume ownership of the leased asset, while finance leases are those where the lessee assumes ownership of the asset.

Lease accounting has several key components, including lease term, lease payments, and lease modifications. The lease term refers to the length of time that the lessee has the right to use the leased asset. Lease payments include initial lease payments, periodic lease payments, and variable lease payments. Lease modifications may include changes to lease terms, payments, or other aspects of the lease agreement.

The importance of lease accounting lies in its impact on financial reporting. Accurate and transparent financial reporting is essential for businesses to make informed decisions and comply with regulatory requirements. By including lease assets and liabilities in financial statements, businesses can provide a more complete picture of their financial position.

In addition, lease accounting can also have tax implications for businesses, as lease payments may be deductible expenses for tax purposes.

Overall, lease accounting is a complex but critical aspect of financial reporting. By understanding the key components of lease accounting and following the relevant standards, businesses can ensure accurate and transparent reporting of lease assets and liabilities, leading to better decision-making and compliance with regulatory requirements.

Tax Implications of ASC 842: Lease Accounting Standards


The FASB ASC 842 Lease Accounting changes, which became effective at the end of 2021 for all reporting periods after December 15th 2021, haven’t just changed how leases are handled in books, but also the tax implications that may come along with it.  

There are seven key areas where lease accounting tax implications are impacted. Here, we’ll discuss those seven areas in detail to give you an overview of what’s going on.  

Tax Implications of ASC 842 Changes 

1. Accounting Methods 

This goes without saying that while there are some areas that won’t require as many changes, others may require definite changes. The lease accounting structure needs to be revisited in terms of tax accounting because of the potential change in: 

  • Characterization of leases 
  • Timing of lease 
  • Timing of income 
  • Tenant allowances (general treatment) 
  • Valuation allowance 
  • Lease acquisition costs (general treatments and borrowing costs) 

2. Deferred Taxes – DTA and DTLs 

According to the changes in ASC 842, operating leases should now be recorded as right-of-use (ROU) assets, and will host a corresponding lease liability as well. This will result in book-to-tax items requiring reconciliation from book keepers, specifically having to revisit the new deferred tax liabilities (DTL) and deferred tax assets (DTA).  

This is a temporary change and will reverse over the leases life.  

3. State/Local Taxes 

The new standard requires lease-related ROU assets to be recorded and may therefore increase an organizations’ balance sheet, presenting an ‘inflated statement’, which in turn, may lead to an increase in the taxes. 

This is dependent on state requirements on determining income tax. 

4. Transfer Pricing 

Since lease assets (ROU only) will need to be recorded in the financial statements of organizations, there is a good chance that bookkeepers will have to revise transfer pricing arrangements to adhere to the “arm’s length” standard.  

The chance in financial ratios and profit level indicators will impact the standard directly. 

5. Foreign Taxes 

This is one tax implication that almost everyone was prepared for; the effect on foreign country income tax.  

Just like state and local income taxes depend on where company operations are taking place, the new standard’s requirement for ROU assets being recorded will have a similar impact on foreign country income tax. This bit is mostly dependent on the tax environment of the country where a company, its branch or subsidiary is located.  

6. Property Taxes 

Another impact on leases that will be a result of state, local or foreign tax environment will be property tax levied on leased assets. If ROU assets are considered tangible personal property, property taxes will also be implemented on the assets. 

7. Sales-and-Use Taxes 

Depending on whether local, state or foreign tax environment treats the lease transaction as a taxable purchase or not, organizations may have to pay sales tax on said leases as well. This will also reflect directly on the books 

ASC 842 can get very complicated, especially now that new changes are being implemented. If not handled properly, chances are that you may end up being subject to audit objections. iLeasePro is a lease accounting software that considers all the latest changes and gives you clean, comprehensible and audit-ready books quickly. 

To schedule a free demo, get in touch with us today!  

Effective Dates of ASC 842 Changes & Transition Approach

We have extensively discussed how the implementation of ASC 842 (Lease Accounting) will impact the current and future books of companies across the board who are following GAAP principles. The goal of these changes is to streamline lease accounting, but the implementation process itself is rather complicated – especially if done manually.  

FASB has offered several reliefs to organizations transitioning, which also includes shift of transition dates from December 31st, 2019 to December 31st, 2021. In this article, we will take a closer look at those effective dates and the transition approaches companies have at their disposal. 

Effective Dates of ASC 842 

FASB has thus far given organizations (referred to as entity in their notices) a lot of leeway, considering the complexity of the task. During the transition phase, entities can choose whether they want to apply the changes in ASC 842 on the effective date, recognizing the effect in their opening balance of the next year (in their equity), or a comparative option.  

In the first option, i.e. the Effective Data Option, any and all adjustments made to their opening balance (equity) will report comparative figures (respective to periods) in the financial statement according to legacy GAAP, i.e., in accordance with the older version of ASC 842.  

On the other hand, if an organization chooses to go with the Comparative Option, they can choose to elect the new changes in each topic at the beginning of the next period. The cumulative adjustment that will be presented because of this change will therefore be adjusted in the opening balance (equity) of the new period. 

The effective dates for these changes are as follows: 

  • For Public business entities, the effective date for application of ASC 842 stood at December 15th, 2018, and the interim periods within that year. 
  • For other entities, including public business entities that are not for profit entities or have conduit debt and employee benefit plans that need to be filed with the Securities and Exchange Commission, the final date for applications of ASC 842 stood at Dec. 15, 2019
  • Due to the complexity presented by the implementation along with further changes being discussed, FASB chose to defer effective dates for entities other than public entities (mentioned in point 1) to 2020 via ASU 2020-05. These dates were first deferred to December 15, 2019, but now for “other entities” the date has been deferred to fiscal years that will start after December 15, 2021. The same is applicable for interim periods that will start after December 15, 2022
  • Despite these dates, entities are permitted – and even encouraged – to implement the changes early on. 

There are several transition reliefs that FASB has offered to the transitioners – especially those transitioning early. These include optional accommodations (elected as a package), lease renewals and purchase options and land easements that we will discuss in a separate article. 

Embedded Leases within a Contract Under the ASC 842 Standard

Lease contracts under ASC 842 We previously discussed how FASB had discussed changes in ASC 842: Lease Accounting in Rate Implicit in the lease as well as the determination of IBR. The board has also outlined the concern presented by some preparers about the identification of leases embedded within a contract.   The main issue was that entities spent significant amounts of time trying to identify and account for leases already embedded into contracts. ASC 842 requires entities to recognize and report all operating leases – both assets and liabilities – as and when the lease commences.   The Problem  ASC 842 suggests that if any contract includes a lease as identified under ASC 842 or simply gives a party the right to control property and reap the benefits and bear losses from the same in exchange for consideration (for a fixed amount of time), it needs to be recorded as a lease in the company’s balance sheets.   Since there are a large number of potential lease contracts, the manual mode of recognition of these “embedded leases” is a costly venture for preparers.  Entities often set a minimum threshold for the recognition of lease assets or liabilities – below which they are treated as immaterial, and therefore, just an expense in the Income Statement. This is an acceptable approach for FASB, since it makes the implementation of ASC 842 easier.  Having said that, the minimum threshold remains a matter of entity preference and therefore, a source of inconsistencies.  Alternatives Proposed  When exploring options about the need for a change in ASC 842 requirements for embedded leases, FASB proposed three alternatives: 
  1. No change. 
  2. Implementation of a “qualitative” minimum threshold. Here, if an embedded lease doesn’t represent the majority of a contract, it doesn’t have to be reported.  
  3. Implementation of a “quantitative” minimum threshold. Here, if an embedded lease doesn’t exceed $5,000 when new.  
When the alternatives were discussed among members, preparers, users and representatives, the following arguments came forward.  
  1. Since the recognition of embedded leases isn’t new under ASC 842, most entities already have some process implemented to review and identify them. However, it’s when recognizing leases and liabilities as operating leases that the new processes will be needed, which is why the first alternative seemed viable to many. Furthermore, Update 2016-02 of ASC 842 on the materiality of a lease has already been discussed.  
  2. The second and third alternatives, both gained some sympathy from participants – especially those representing non-public entities, but there was a concern that if a qualitative or quantitate threshold is used, it may give rise to the practice of shaping contracts in a way as to prevent it from falling under ASC 842.  
The Decision  All three alternatives were favored and not favored equally by those in the conference. The quantitative threshold implementation was most favored since it would improve convergence with IFRS 16: Lease Accounting. However, it was also determined that convergence doesn’t necessary mean easy implementation of said threshold. It would duplicate the thresholds already established under ASC 842.   Implementing either the qualitative or quantitative threshold would demand an update over time. Right now, entities need to show why the current threshold is appropriate, something that would not be possible if a quantitative or qualitative threshold is specifically mentioned in ASC 842.   At the end, the first alternative, i.e., making no change to the standard and the definition of a lease under US GAAP was agreed upon.  If you’d like to learn more about other changes, we recommend you subscribe to our blog. We document any and all changes to ASC 842: Lease Accounting regularly to ensure our readers are always up to date!  Try iLeasePro for free right now; You can take a video tour of iLeasePro or schedule some time on our online demo calendar to see how iLeasePro can help you and your firm comply to the ASC 842 Standard.  

Changes in ASC 842 Topic Lessee Application of Rate Implicit in the Lease – Is the Use of IBR Enough?


In previous post, we discussed how FASB is finalizing a change in ASC 842: Lease Accounting. As it stands, the change is set to impact every business that adopts GAAP to settle their books. FASB had been releasing updates every now and then to ensure that the new changes are well understood and implemented by the effective date. 

Although the implementation was due in 2019, due to some changes being considered by the FASB, this effective data has been delayed. On September 18, 2020, FASB came up with several updates to the standard and expressed them in two (virtual) roundtables, notes of which were also shared publicly. 

The updates were in regard to the challenges faced by organizations across the globe implementing ASC 842. FASB board members, industry group members, accounts preparers, users and others were present at the roundtable. 

One of the first topics to be discussed was the rate implicit by lessees in a lease.  

The Problem 

The principal amount of a lease is mentioned in contracts and in the books, but the interest rate itself isn’t explicitly mentioned anywhere. Instead, the lessee can determine the rate implicit with the help of present value factors, as required by ASC 842-20-30-3. 

This value needs to be mentioned if “readily determinable,” but if there are no present value factors available that can help determine the rate, lessees will have to mention the IBR (incremental borrowing rate). 

And therein lies the issue. The phrase “readily determinable” has become a major hurdle when it comes to the limitations on lessor-specific assumptions. These assumptions will usually be considered as factors that come in the way of allowing lessees to be able to determine the rate easily. Lessees usually don’t know every aspect of the agreement like lessors do.  

For example, a bank leasing equipment to a company would have a much clearer picture of the agreement compared to the company.  

Alternatives Proposed 

According to research conducted by FASB members, there were three potential alternatives to this: 

  1. No change to ASC 842 
  1. Eliminating the requirement for consideration of rate implicit 
  1. Providing a mode of rate implicit measurement to lessees in ASC 842  

Right now, lessees almost always use IBR in place of rate implicit unless the lessor specifically lets the lessee know the rate. Because of this, FASB made the following observations respectively. 

  1. The first alternative was the most preferred one out there, considering how it eliminated the need for implementation of new processes. By doing so, ASC 842 remains consistent with IFRS 16 
  1. A problem that arose was that since most lessees used the IBR by default, why was there any need for FASB to recommend the use of rate implicit in the first place? It would only cause more confusion. However, an argument was made that using this rate for lessees resulted in a symmetry in accounts, i.e., classification and measurement between lessor and lessee. However, it was determined that it wasn’t the board’s objective to achieve symmetry, but only consistency and clear representation.  
  1. The third alternative suggested the use of a uniform method of determination of the rate implicitIf implemented, it would increase the usage of this rate compared to before the change. While this would introduce a bit more complexity in lessee accounting, it would result in more consistent and comparable books. 

The Solution 

Although the third alternative offered uniformity, stakeholders agreed that the lessee application of rate implicit in the lease didn’t need any change. Account preparers and users mostly agreed that they didn’t struggle when it came to applying the phrase “readily determinable” in their books.  

Some did argue, however, that since there was no struggle with regards to ACS 842, it didn’t mean that there is no concern about the use of rate implicitSome agreed that alternative C would be best-suited for future lessee accounting and therefore, consistency.  

While this ASC 842 topic didn’t see any change, the FASB also considered other topics, such as Embedded LeasesLessee Application of Incremental Borrowing Rate and Lease Modifications. You can learn more about these topics in upcoming entries on our blog page, or if you’d like to get straight to its implementation, we recommend you try out iLeasePro, a fully automated lease accounting solution 

Get in touch with us today to schedule a free demo! 


ASC 842 Changes: Would a Specific Incremental Borrowing Rate Be Better?

image_pen The problem of determining the rate implicit in a lease also presented a concern that most preparers used the incremental borrowing rate (IBR) as the discount rate. However, that wasn’t the only concern that came to light during FASB’s roundtable in September 2020.   Apart from the rate implicit, members also discussed the IBR; i.e., how those that have adopted ASC 842 determine the IBR. It was recognized that a lot of time and effort goes into estimating the borrowing rate.  The Problem  For Non-Public Business Entity (Non-PBE) lessees, a risk-free rate is determined which uses a period set in the lease terms (paragraph 842-20-30-3). This risk-free rate was another cause for concern at the roundtable. The use of this risk-free rate under the current economic climate meant low rates and therefore high artificial lease liabilities, thus being potentially misleading for users.   When the costs incurred to determine the IBR, and the prospect of using a risk-free rate were combined, a question arose whether non-public business entities as well as public should be allowed to use some other rate or not.  Alternatives Proposed  Based on the argument, FASB proposed two alternatives to the members, preparers, and users in the roundtable handout. 
  1. No change. The rate and method used right now to determine and use IBR for PBE and non-PBEs should remain the same.  
  1. Both PBE and non-PBE lessees must use a market-specific rate instead of IBR.  
When the two alternatives were discussed, following were the respective arguments for and against the prospects.  
  1. Non-PBE would encounter issues when trying to determine IBR that falls on the definition presented in ASC 842 for IBR. The problem they would face would primarily be that they don’t have enough resources or departments that can determine a lease credit risk. However, if nothing is done, it is important to remember that the cost of determining IBR will only go down on a go-forward basis.  
  1. The second alternative suggested that a rate be recommended like in ASC 944 (Insurance) and ASC 715 (Compensation). The use of this rate would significantly simplify the whole process, not to mention result in more uniform and comparable books. The problem here is that the rate may be very different from risk-free rates that non-PBEs use. 
The Decision  Most participants agreed that the first alternative is much better, i.e., current requirements for IBR should remain the same for public companies. Preparers agreed that creating a new process for IBR would cost even more, though they agreed that postimplementation costs would be lesser.   Since users mostly use Disclosureto compare and evaluate companies, IBR didn’t really make much of a difference there.  However, this was all limited to PBEs. When it came to non-PBEs, most members were in favor of making adjustments to the standard. The change in ASC 842, if any, would be targeted toward allowing non-PBEs to choose whether they use the risk-free rate on: 
  • An asset-class basis  
  • Or for the whole entity. 
It was acknowledged there was a certain arbitration involved by allowing non-PBEs to use risk-free rates. To that end, members mostly were in favor of letting the FASB determine a specific rate for non-PBEs and implementing it via ASC 842.   Try iLeasePro for free right now; You can take a video tour of iLeasePro or schedule some time on our online demo calendar to see how iLeasePro can help you and your firm comply to the ASC 842 Standard.

Sage Intacct and iLeasePro Announce Major Integration Enhancement

iLease Management LLC (“iLease”), developer of iLeasePro, an enterprise cloud-based Lease Management and Accounting solution, has announced a major step forward in its strategic partnership and integration with Sage Intacct, a leader in cloud-based financial management and accounting software. iLease has released the capability to take advantage of Sage Intacct’s dimension feature to seamlessly track and report lease related financial and operational data.

The Sage Intacct dimension feature offers an entirely new way to track and report on financial and operational data, while simplifying the user’s chart of accounts. With dimensions, a user “tags” a transaction with certain designations such as department, location, etc., without the need to expand the chart of accounts. By adding this new feature, an iLeasePro user can tag any dimension to the general ledger accounts associated with the lease. Once tagged, the iLeasePro user can automatically generate the journal entries with the dimensions and via webservices, upload the journal entries into the Sage Intacct general ledger.

“We are excited that we have made a major step forward in our integration with Sage Intacct,” stated Sean Egan, Managing Partner iLease Management LLC. “It was clear in speaking with Sage Intacct users that the dimensions is such an important feature to their operating efficiency and reporting. Adding dimensions to iLeasePro only strengthens the seamless synchronization of key lease accounting data between the two solutions.”

“We are pleased iLeasePro continues to enhance their integration with Sage Intacct.   As the requirements for monitoring and tracking lease details expand, iLeasePro’s enabling the power of Sage Intacct Dimensions will improve reporting and insight for our mutual customers.“ Chris Rose, Vice President of Business Development at Sage Intacct.

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Proposed Lease Accounting Standard Changes – Key Business Considerations for Lessees

I have heard it said many times that accounting results should not drive the basic economic decisions related to business. And I generally agree with that point of view. But it is difficult to ignore completely the accounting results and business analytical metrics that result from changes in accounting treatment and certainly the changes in lease accounting currently being proposed by the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board (“IASB”) will drive significantly different accounting results and metrics as compared to current accounting requirements. Therefore, let’s examine some of the business considerations that financial decision makers should take into account as they evaluate the impact of the proposed standard. As in the past, our focus will be on lessees since the proposed changes will have the greatest impact on their financial results. The issues will be considered separately for property and equipment leases but many of these issues will be relevant for both types of leases. Further, the impact will be much greater for those companies whose leases are currently categorized as operating leases, so we will limit our discussion to the effect of the change from current operating lease accounting versus the proposed standard. We will also consider how the proposed accounting standard might impact certain selected industries.

Before thinking that we are being premature in dealing with these issues given that the proposed standard might not be effective until 2017, remember that a five year lease that is being finalized currently might well have to be transitioned into the proposed new accounting model at the effective date. Financial decision makers should be prepared to understand, at least in general, the terms of the future accounting ramifications of decisions that are being made currently.   To read more, please download the whitepaper at Business-Considerations-for-the-FASB-IASB-Lease-Accounting-Changes

Lease Accounting Update January 2013: Lease Components in a Single Lease Contract

The FASB and the IASB (“The Boards”) met on January 30, 2013 to continue further deliberations on the Lease Accounting Project. The discussions were narrowly focused on the instances where multiple lease components are contained in a single lease contract. As examples, multiple pieces of equipment could be leased under a single lease contract, a single lease contract could contain both property and non-property components or land and building(s) could be leased under a single lease contract.  The central issue discussed revolves around whether individual lease components in a single lease contract must be accounted for separately. The Boards tentatively concluded that for components that are distinct from other goods and services in the lease contract and the components are not customized to meet the particular needs of the customer, those distinct components should be accounted for separately. A single lease that contains components (for example, property and non-property) that are customized and integrally related would be accounted for as a single lease contract. Land and building(s) contained in separate lease contract would be treated a single component and would not be allocated (a difference from current GAAP treatment).

For a lease contract that contains both property and non-property and must be accounted for as a single component, an additional issue deliberated was which lease classification test would apply in these circumstances. The Boards tentatively concluded that the lease classification of the primary (predominant) asset would determine the lease classification. Therefore, if the equipment was deemed to be the primary asset, the presumption would be that the accelerated amortization method would be used whereas if the property was deemed to be the primary asset, the straight-line method would be presumed to apply.

From the previous example, it is clear that any technology solution that a lessee chooses to employ to comply with the new lease accounting standard should be capable of tracking and accounting for both property and non-property (equipment) components. We at iLeasePro have anticipated this need and are developing our lease management and accounting technology product as an integrated solution for both property and equipment.

The Boards additionally indicated that they plan to issue a revised Exposure Draft (“ED”) by the end of March 2013 which will be open for comment for a period of time. Redeliberations and discussion of comments on the revised ED will begin in the second half of 2013.

Lease Management and Accounting Tool

We have some exciting news to share with all of our readers.  iLease Management LLC will soon launch a lease management and accounting tool that will meet the critical needs of lessees as they react to the new lease accounting standards and continuously try and gain efficiency in their day to day operations.  As we have emphasized a number of times in the past few months, an accounting change of the nature being proposed provides a perfect opportunity to review and improve operating procedures.  We are confident that we are developing a technology solution that will accomplish that objective.  Some of the features and capabilities of this tool are as follows:

  • Dashboard – provides the user with the capabilities to see a high level view of all lease portfolios and critical dates.
  • Property – provides key property metrics and details.
  • Unit – drills down another level to provide critical unit level details.
  • Lease– captures important lease information that will facilitate effective lease management.
  • Rent– provides all critical rent information including base rent, free rent and rent steps.
  • Insurance – captures key insurance information.
  • Lease options – allows the user to effectively monitor option terms and conditions.
  • Accounting – using the information that has been previously input, the accounting feature automatically generates the accounting entries that will be required under the new accounting standard, both by individual lease and in the aggregate.  The user can export these transactions and is then ready to post these entries to the general ledger.
  • Reporting – a full suite of Lease Management and accounting reports

Additionally, the user will have the capabilities to capture key information on retail leases, maintain critical contact information, define critical dates, add specific and customized information on unique lease options and clauses and attach images and key documents.

As you are aware, we are monitoring the FASB/IASB activities and developing the accounting solution to be consistent with the new standard. We expect the tool to be available as soon as possible after the new standard is released.  We have been working on this project for a number of months and will keep you updated on our progress.  Our product will make a significant improvement in your operations.

In the meantime, we are interested in your comments and feedback.  Please update the Blog with your questions, comments and needs for additional information. Additional information can be found on the iLeasePro homepage.

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