Origins of ASC 842
With the financial crisis of the early 2000s, the U.S. Securities and Exchange Commission (SEC) wanted to increase the transparency of an organizations financial position for better clarity in lease accounting so financial reporting portrays accurate valuations for investors.
One more recent development in the area of regulated financial transparency is ASC 842. The FASB worked for years to develop a model that would present virtually every lease on the balance sheet with right of use assets and lease liabilities. A helpful lease accounting tip for private companies: Gain a thorough understanding of the new ASC 842 guidelines and how it surely impacts your organization.
Defining Lease Accounting
Lease accounting can be simply defined as a set of standards that require an organization to account for their leased assets and the practices and procedures involved in compliance with the standards. Leased assets may be real estate, manufacturing equipment or airplanes used by another company or organization under a negotiated contract with the company or organization that owns the assets, just to name a few.
Leases are similarly classified as operating leases or finance leases, depending on the terms of the agreements.
Defining ASC 842
Accounting Standard Codification Topic 842, ASC 842 or ASU 2016-02, is the new leasing standard to replace the U.S. Generally Accepted Accounting Principles (GAAP) ASC 840. a nearly 40 year old standard. Created by the Financial Accounting Standards Board (FASB), the purpose of the new lease accounting standard is to require organizations that lease assets to disclose the assets and liabilities of their leases on the balance sheet.
The former lease accounting standard (ASC 840) instead reported operating leases in the footnotes of financial statements.
Why ASC 842
The new leasing standard ASC 842 specifically addresses an issue found in previous reporting methods regarding these leased assets. Much the same as its predecessor, ASC 840, ASC 842 still classifies lease management in two groups. The first group includes operating leases and finance (capital) leases.
The second group includes leases lasting more than 12 months must be reported on the balance sheet. However, the ASC 842 standard also requires more robust qualitative and quantitative disclosures.
The new standard therefore closes what many considered to be a major accounting loophole in off-balance sheet operating leases. There is approximately $2 trillion in lease liability expected to be added to S&P 500 balance sheets once fully implemented.
ASC 842 replaced ASC 840 after December 15, 2018 for fiscal years and interim periods within those fiscal years for public companies and went into effect for private companies after December 15, 2019 for fiscal years and interim periods within those fiscal years.
Lease Accounting Software Update Setup for ASC 842 and IFRS 16 Compliance offers two ways to achieve lease accounting compliance with CoStar.
- Connect existing lease management systems to CoStar via our proprietary Data Connector.
- Migrate all existing lease data to CoStar with integrated lease administration system.
For more information on the details and history, visit The Financial Accounting Standards Board (FASB) and the Accounting Standards Update (ASU), see www.fasb.org.
