Under prior lease accounting guidance, an operating lease was not reflected on the balance sheet and payments were expensed on a straight-line basis. Instead, a capital lease was treated more as a loan, and the asset was reflected on the balance sheet.

Under ASC 842, here are five distinctions between capital leases and operating leases based on the FASB’s “bright-line” tests (only one has to be met):

Historically, the vast majority of leases have been operating – and remained buried in the footnotes rather than appearing on the company balance sheet. However, with the new lease accounting standards already effective for public companies and the deadline approaching for private company compliance, it is estimated trillions of dollars will be moved to the balance sheet because now almost every lease will need to have a corresponding Right of Use (ROU) Asset and Lease Liability, regardless of classification type.  Choosing a comprehensive, proven lease accounting, lease management and lease administration software from CoStar allows you to manage leases in the manner that best suits company practices, process and adhere to new ASC 842 guidelines.