Accounting for Leases Under ASC 842

Accounting for leases can be complex. Make sure you get it right using BDO's "Blueprint" publication.

BDO's Professional Practice publication (Blueprint) guides professionals through the application of FASB’s Accounting Standards Codification Topic 842, Leases (“ASC 842” or “leases guidance”). Summarizing key aspects of ASC 842, the Blueprint helps all companies, public or private, understand and comply with the leases guidance.

This Blueprint was updated in April 2023 for FASB amendments to ASC 842 and BDO’s views on practice issues. Significant changes to this update are listed in Appendix B.

The Blueprint includes practical examples and interpretive guidance to assist companies and practitioners in their continued application of ASC 842. Divided into chapters focused on key aspects of the leases guidance, the Blueprint is organized in the order an entity applies ASC 842 and the corresponding questions the entity needs to address.

Explore the chapters below!

Scope of ASC 842
First things first: An entity needs to determine whether a contract is within the scope of ASC 842 and understand the scope exceptions. Then it can proceed with examining other key aspects.

Identifying a Lease
It’s critical to know whether a contract is or contains a lease. The definition of a lease under ASC 842 is similar to ASC 840, but there are important nuances to grasp. 

Identifying and Separating Components
A contract may include the lease of more than one asset and one or more nonlease components.  Identifying the components of the contract will help determine which GAAP applies to each.

Lease Classification and Key Terms
It’s important to appropriately identify the commencement date of a lease component and answer other questions — regarding lease term, lease payments, discount rate and more — to perform the lease classification tests.

Accounting for Leases — Lessees
Once a lessee has determined how to classify lease components, the lease can be recognized and measured on balance sheet at the commencement date — unless the practical expedient for short-term leases is elected.

Accounting for Leases — Lessors
Accounting for leases by lessors remains broadly consistent with previous GAAP and varies depending on lease classification. However, aspects of the guidance were aligned between lessees and lessors and with the revenue standard.

Other Topics
There are further aspects of ASC 842 related to specific transactions and interactions with other areas of GAAP. These types of transactions include subleases, sale and leaseback transactions, business combinations and income taxes.

Presentation and Disclosures
ASC 842 includes enhanced disclosure requirements, including an overall disclosure objective and expanded disclosure requirements for leases. The more extensive the entity’s leasing activities, the more comprehensive the disclosures are expected to be.

Adopting ASC 842
A proactive approach to adoption can be beneficial. For private companies and private nonprofits, ASC 842 was effective for fiscal years beginning after December 15, 2021. 

Download the entire accounting for leases under ASC 842 Blueprint Series