The new FASB lease accounting standard has many companies examining the criteria for adding leases to their balance sheets.

As many companies begin preparing to comply with the new Financial Accounting Standards Board (FASB) ASC 842 lease accounting standard, they’re asking a common question: What exactly is a lease?

Ryan Brady, senior manager at Grant Thornton, was quoted in Compliance Week as saying, “If it was a lease under the ASC 840 (FAS 13) current standard, it’s still a lease.” The FASB recently issued a statement that echoes this opinion, explaining “Most contracts that are accounted for as leases today will continue to be accounted for as leases under the new guidance.”

While addressing “most” lease contracts may offer some comfort to accounting teams, the question becomes this: What are the exceptions?

Leases that are embedded in larger rental or service contract agreements are the challenge. Often, these embedded leases are overlooked during preparations for lease accounting compliance. If classified incorrectly, they can create balance sheet errors and the need for restatements.

To successfully comply with the new standard, companies should create a proven plan to update policies and procedures for lease agreements, including the thorough definition of which leases will need to be added to balance sheet calculations. These plans should be shared with each company’s audit team to ensure they meet GAAP expectations for each definition.