Accounting for Leases: Lease Classification and Key Terms

October 2021


The previous article in our Accounting for Leases Under ASC 842 series outlines how an entity identifies and separates components in a lease contract. An entity then generally accounts for the lease component under ASC 842 and non-lease components under other guidance. That lease component’s classification determines the accounting process.

In this article, we discuss the questions that need to be answered to perform the lease classification tests and determine the lease component’s proper accounting, as well as key terms to know.

What’s Inside:

  • Overview of lease classification.
  • Definition of a lease’s commencement date and examples of how to determine it.
  • Process for determining the lease term, with examples.
  • Step-by-step guidance for determining the lease payments, with examples and exceptions.
  • ASC 842 definitions of initial direct costs, discount rate, economic life and fair value.
  • How to perform the lease classification assessment, with examples.