Accounting for Leases Under ASC 842

Major changes to lease accounting standards are about to take effect for private companies, making it critical that you get the resources you need to ensure adoption and full compliance.

BDO's Professional Practice developed a practice aid to guide professionals through the process of Accounting for Leases Under ASC 842. Summarizing key aspects of FASB’s Accounting Standards Update (ASU) 2016-02 (“Topic 842” or “the new standard”), the aid will help private companies and nonprofits begin to apply the new standard, which takes effect for fiscal years starting after December 15, 2021.

The Practice Aid includes practical examples and interpretive guidance to assist companies and practitioners in their adoption and continued application of ASC 842. Divided into a series of articles focused on key aspects of the new lease standard, the Practice Aid is organized in the order an entity would apply ASC 842 and the corresponding questions the entity would need to address.

Explore the articles below and understand how to apply the accounting standard accurately, from start to finish.

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

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 will be effective for fiscal years beginning after December 15, 2021. Early adoption is permitted for all entities.

Download the entire accounting for leases under ASC 842 practice aid series