Accounting technology / Glossary / ASC 842

What is ASC 842?

Definition

ASC 842, Leases, is the US GAAP lease standard. It requires lessees to record most leases longer than 12 months on the balance sheet as a right-of-use asset and lease liability, but keeps two classes: finance leases, expensed as depreciation and interest, and operating leases, which show a single straight-line lease cost in the income statement.

Also calledTopic 842ASC 842 Leases

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Public companies: Periods after 15 December 2018
Private companies: Years after 15 December 2021
Lease classes: Finance and operating

How ASC 842 works

ASC 842 replaced ASC 840. Public business entities applied it from annual periods beginning after 15 December 2018; after a deferral, private companies applied it from fiscal years beginning after 15 December 2021. A lease is a finance lease if it meets any of five tests, such as transfer of ownership, a purchase option the lessee is reasonably certain to exercise, a term covering the major part of the asset's life, or payments amounting to substantially all of its fair value; otherwise it is an operating lease. Both types appear on the balance sheet. Leases of 12 months or less can be kept off it by policy election. Private companies may use a risk-free rate in place of the incremental borrowing rate. Because operating lease cost stays in one line, ASC 842 profit figures differ from IFRS 16 for the same lease.

Common questions

What is the difference between a finance lease and an operating lease under ASC 842?+

Both go on the balance sheet. A finance lease is expensed as amortisation of the asset plus interest, front-loading cost; an operating lease shows one straight-line lease cost over the term.

Can private companies use a risk-free rate under ASC 842?+

Yes. Entities that are not public business entities may elect to discount lease payments at a risk-free rate, such as a Treasury rate for a similar term, instead of their incremental borrowing rate.

Which leases are exempt from ASC 842 balance sheet recognition?+

Leases with a term of 12 months or less and no purchase option the lessee is reasonably certain to exercise, if the company elects the short-term lease exemption. There is no low-value exemption as under IFRS 16.