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What Is ASC 842?

What is 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 impacts your organization.

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 classified as operating leases or finance leases, depending on the terms of the agreements.

Nearly 10 years in the making, 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 where as the former lease accounting standard (ASC 840) reported operating leases in the footnotes of financial statements.

The new leasing standard ASC 842 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: operating leases and finance (capital) leases, and 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 closes what many considered to be a major accounting loophole in off-balance sheet operating leases. It is said 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 will go in 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.

  1. Connect existing lease management systems to CoStar via our proprietary Data Connector.
  2. Migrate all existing lease data to CoStar with integrated lease administration system.

For more information on the details of ASC 842 developed by The Financial Accounting Standards Board (FASB) and the process history of the Accounting Standards Update (ASU), see www.fasb.org. Click here for more information about CoStar’s lease accounting software which is fully compliant with the new standards.

Matt Waters, CPA

Lease Accounting Subject Matter Expert with over 15 years of Management Experience in Accounting and Finance