Some analysts are concerned about rumors of off-balance-sheet financing. The concerns stem from a perceived nuance in ASC 842 lease accounting guidance that creates a loophole that enables off-balance-sheet financing. This would be alarming because ASC 842 was specifically designed to eliminate off-balance-sheet funding in the form of operating leases. 

However, despite rumors, ASC 842 has not created a disturbing new loophole.

The nuance relates to leases companies have committed to but have not commenced. ASC 842 defines the commencement date as the “date on which a lessor makes an underlying asset available for use by a lessee.” The date lessees take possession of an asset, not the commitment date, is when they must put the right-of-use asset and lease liability on the balance sheet.

A company does not have to record a liability on its balance sheet when it commits to lease an asset.  However, this hardly qualifies as off-balance-sheet financing because the liability should be recorded as quickly as the company takes possession of the purchase.

Furthermore, if financial statements are issued between commitment and commencement dates, ASC 842 requires a disclosure detailing lease that have yet to commence but create significant rights and obligations for the lessee.

ASC 842 closed the door on operating leases as a form of off-balance-sheet financing. The rules around lease commitment vs. commencement dates do not provide a similar opportunity to avoid reporting lease liabilities.