Lease Accounting and the ASC 842 Standard
Lease accounting requires extra consideration when you work in finance or this area of business. There is one accounting standard that everyone working with leases should know about when it comes to accounting for them. That is the one named and concerning ASC 842 lease accounting.
We shall look to find out as much as we can about the accounting standard and its leasing relationship.
Origins of ASC 842
It took ten years to happen, but ASC 842 would become the new lease standard that would replace the GAAP ASC 840 that had stood as the old standard for some 40 years.
ASC 842 is also known as ASU 2016-2, to help you identify its use now and everywhere that it is mentioned.
Difference Between ASC 840 and ASC 842
With ASC 842, the direct costs are defined as incremental costs in respect of a lease that could not have occurred had the lease have not been obtained.
Conversely, with ASC 840, the incremental direct costs would include internal costs in addition to external costs that would include legal fees that were incurred even before the lease was acquired.
This all means that ASC 842 is in effect reporting things more accurately and giving a truer reflection of the accounts to investors and potential investors.
When Did ASC 842 Come Into Effect?
It was in December 2018, from the 15th, that this new accounting standard for leasing came into effect. This was for public companies.
It was from December 2021, and again from the 15th, that the lease accounting standard would apply to private companies. They have had that time to become familiar with it and now it is applying to anyone involved with leasing assets, whether working as a private or public company.
The assets for leases now have to be noted on the balance sheet as well as the liabilities for the rights and any obligation that are created in respect of the lease. This is where the lease term is over one year. That is one exception when it comes to accounting for leases on the balance sheet to comply with ASC 842.
Does ASC 842 Apply to Capital Leases?
It is assumed that a capital lease under ASC 840 will become a finance lease under ASC 842. This transitioning process must be allowed for when there is an accounting standard change so that the previous is then taken into consideration by the new. It is about working out how things are classified. Transparency is what is needed when it comes to any accounting situation. Anybody looking at the figures should be able to work out what is impacting them.
The above should provide an insight into what ASC 842 is and how it affects anyone accounting for leases on a balance sheet, as is the requirement in most cases now. Accountants are constantly required to keep up to date with the latest accounting standards and then disseminate this information to all who work under their command in a finance department. It is not a bad idea either for all staff to themselves read up on these different accounting standards to better understand them.
Anyone working with leases will need extended financial knowledge to incorporate this extra aspect of accounting into their working practices. Computer software can take care of the ASC 842 in many respects by guiding employees to enter the right data that will take its position on the balance sheet as required. It is still prudent as a double-check to know how lease accounting standards work and the reason why we are now showing leasing assets as we are.