An Overview of ASC 842 Leases
When ASC 842 was first issued, there was panic in thinking about the process to identify all leases and get them on the balance sheet. Will there be enough time? Do we have enough manpower to do this?
While companies are considering many complexities for implementing ASC 842, I’m here today to provide you with an overview of ASC 842’s requirements.
Lessee accounting under ASC 842
From a lessee’s perspective, under ASC 842, all leases will be recorded on the balance sheet with the exception of short term-leases if the lessee elects the recognition and measurement exemption for those leases.
There is a dual model approach for lessee accounting. At lease commencement, a lessee will classify a lease as either a finance lease or an operating lease.
Also, at the commencement date of the lease, a lessee will recognize a lease liability, which represents the lessee’s obligation to make lease payments to the lessor, and a right-of-use (ROU) asset, which represents the lessee’s right to use the underlying asset during the lease term.
The initial recognition of the ROU asset and the lease liability is the same for finance leases and operating leases. Subsequent accounting and financial statement presentation for the lease depends upon the lease classification.
Lessor accounting under ASC 842
At the commencement date of a lease, a lessor will classify leases as:
- A sales-type lease
- A direct financing lease, or
- An operating lease
For sales-type and direct financing leases, a lessor derecognizes the underlying asset and recognizes a net investment in the lease. For operating leases, a lessor does not derecognize the leased asset at the commencement date.
The requirements of ASC 842 are quite extensive, so it is impossible to cover everything in detail here! Lucky for you, we have a four-part lease course collection, where we cover ASC 842 in more detail. Below is a summary of our four courses that are available.
ASC 842 training
Course 1 – Leases: Overview of ASC 842
There are fundamental key concepts that you must understand to apply the guidance of ASC 842. These are covered in our first course.
In this overview of ASC 842 course, you will learn:
- The definition of a lease and how to apply the definition to be able to determine what contracts or contract terms are required to be accounted for under ASC 842
- Scope exceptions to ASC 842
- The practical expedient for short term leases
- How to identify and separate lease and non-lease components
- Allocating contract consideration
- The key concepts of the lease term, lease payments, and discount rate which are needed to classify and measure leases
- The various lease classifications and the criteria for lessees and lessors to appropriately classify leases, and
- An overview of the accounting by lessees and lessors based on lease classification
After covering key concepts of ASC 842, including how to identify a lease, the next two courses go into more depth on lessee accounting and lessor accounting.
Course 2 – Leases: Lessee Accounting Explained
In this course you will dive deeper into lessee accounting under ASC 842. The course covers:
- The dual model approach and the specific criteria for determining whether a lease is a finance lease or an operating lease
- How to calculate the lease liability and the right of use asset in order to initially recognize a lease on the balance sheet
- Subsequent measurement of a lease based on whether the lease is classified as a finance or operating lease, and
- Presentation and disclosure requirements
Course 3 – Leases: Lessor Accounting Explained
In our third course on ASC 842, we look at leases form the lessor’s perspective, including:
- The three lease classifications and the criteria to classify a lease as either a sales-type lease, a direct financing lease, or an operating lease
- Initial recognition of a lease based on the classification
- Subsequent measurement of a lease based on the classification
- Other lessor specific guidance related to separating components of a contract and lease modification accounting, and
- Presentation and disclosure requirements
Finally, the last course in our ASC 842 collection dives into the accounting for changes after the commencement date.
Course 4 – Leases: Changes After The Commencement Date
Certain events may occur that would require reassessment of key estimates and judgments on leases and/or to remeasure lease payments. Other changes that have accounting implications include modifications to the lease and lease terminations.
In this course, we cover:
- When a contract should be reassessed
- Remeasurement of lease liabilities and right of use assets by the lessee or the net investment of the lease by the lessor
- Accounting for lease modifications, and
- Accounting for lease terminations
Final thoughts
As summarized above, there is quite a lot to learn about lease accounting under ASC 842! Regardless of how many leases you have, lease accounting is COMPLEX. Investing in your knowledge and education on ASC 842 will be critical for successful financial reporting (and auditing).
Check out our Leases topic page for summarized considerations on ASC 842, including additional resources to use!
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Disclaimer
This post is for informational purposes only and should not be relied upon as official accounting guidance. While we’ve ensured accuracy as of the publishing date, standards evolve. Please consult a professional for specific advice.
