Some analysts are concerned about rumors of off-balance-sheet financing. The concerns stem a perceived nuance in ASC 842 lease accounting guidance creates a loophole that enables off-balance-sheet financing. This would be alarming because ASC 842 was specifically designed to eliminate off-balance-sheet financing in the form of operating leases. However, despite rumors, ASC 842 has not created an alarming new loophole.
The nuance is related to leases that companies have committed to but have not yet 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 the date 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 as soon as it makes a commitment to lease an asset. However, this hardly qualifies as off-balance-sheet financing because as soon as the company takes possession of the asset, the liability should be recorded.
Furthermore, if financial statements are issued during the time between commitment and commencement dates, ASC 842 requires a disclosure detailing leases that have not yet commenced 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.