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A Guide to ASC 842 Lease Accounting | Bloomberg Tax
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ARTICLE
A Guide to ASC 842 Lease
Accounting
January 9, 2023
IN THIS ARTICLE
How is ASC 842 compliance challenging, and how can companies adapt?
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How does ASC 842 affect leveraged lease arrangements?
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Boost your leased assets management efficiency with a single source of centralized
data and automated processes. Learn more.
[Stay compliant using fixed and leased assets software from Bloomberg Tax before the
ASC 842 deadline. Request a demo.]
As finance and accounting departments manage challenges such as limited resources and an
increased volume of data, they also must navigate a new lease accounting standard called the
Accounting Standard Codification 842 (ASC 842), which updates the definition of a lease and
requires businesses to report operating leases on their financial statements.
The Financial Accounting Standards Board (FASB) created the standard in 2016, with the goal of
correcting the perceived problem of lessees leaving operating leases off their balance sheets.
Analysts and investors argued that companies with operating lease payments each month
appeared less indebted than companies with mortgages for office space or other kinds of
financing arrangements to report on their balance sheets.
Notably, the FASB announced public companies had to comply with the standard for fiscal
years after December 15, 2021. After receiving an extension, private companies must comply
with ASC 842 by their first annual report of 2022 – which, for most calendar-year companies,
was December 31, 2022.
The need for private companies to comply with ASC 842 requirements continues to be
daunting for some. However, private companies moving toward compliance or refining their
reporting processes for the future can keep track of their leases with updated lease accounting
software that is tailored to comply with the ASC 842 standard.
How is ASC 842 compliance challenging,
and how can companies adapt?
Prior to ASC 842, lessees could leave certain leases off their balance sheets if they passed the
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“bright line” test. This test required specific lease term lengths and minimum lease payments
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based
on information,
the asset’s economic
For more
see our life and fair value in order for the lease on that asset to be
PREFERENCES
ACCEPTwent
included
on aBy
balance
sheet.
Now, accountantsMANAGE
must track
down all leases that previously
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unreported
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line test.
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The first step to complying with ASC 842 is to pin down and include agreements that now count
as leases under the new standard. With the exception of certain short-term leases, both
“operating leases” and “finance leases” must be reported. The new lease accounting standard
defines a lease as an operating lease when the lessee does not control the underlying asset
and as a finance lease when a lessee does control the underlying asset.
The new rule also introduces several new terms that accounting departments must adopt
when tackling their lease accounting, such as “right-of-use (ROU) asset” and a “lease liability.”
ROU assets are those that will be capitalized by the lessee and represent the lessee’s right to
use an underlying asset for the lease term. Rather than label the asset as a capital asset – such
as a truck – the ROU description will enable financial statement users to separate those assets
actually owned from those capitalized because of leases.
Although the new standard includes some changes that affect lessor accounting and
disclosure, such as eliminating leveraged leases, the new rule mostly affects lessees.
Download: Understanding the New Lease Accounting
Standard
Get a clear view of the latest lease accounting standards in our free downloadable guide.
How does ASC 842 affect leveraged lease
arrangements?
Lessors previously enjoyed reporting benefits with leveraged lease accounting under the old
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standard.
old
way
resulted in a greater portion of the income reported early in the lease,
to improveThe
your
user
experience.
and
in cases
of a tax-leveraged
For more
information,
see our lease, the yield on the lease investment was generally higher.
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PREFERENCES
ACCEPT
But thePolicy
new lease
accounting
standard eliminates
“leveraged
lease” as a lease classification.
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By clicking
"Accept",
you
the
uselease
of cookies.
This agree
is truetofor
any
with a commencement date on or after December 15, 2021 – the
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Change
anytime
effectiveyour
datesettings
of ASC 842
for public companies. The new standard stipulates that leveraged
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leases with a commencement date prior to December 15 will be grandfathered for lessors.
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Determining the commencement date for leverage lease agreements is tricky. Often leveraged
leases are large transactions structured and arranged well before an asset is available to be
leased. For instance, assets with values in excess of $75 million are often financed via a
leveraged lease, and often the assets are constructed or manufactured years before the
commencement of the lease. It is unknown how ASC 842 will be applied to these transactions if
the projects are not yet complete.
Any modification of a leveraged lease on or after the effective date will require application of
the new lease accounting standard. In addition, if a lessee exercises an option to extend a lease
and exercise of that option was not previously reasonably assured, it is considered a
modification for purposes of this rule.
How can ASC 842 lease accounting
software help companies meet
standards?
Compliance with ASC 842 will continue to be a necessity. To meet the challenge of complying
with ASC 842 standards, accounting departments should purchase lease accounting software
created after ASC 842 standards were first published in 2016. That’s because software
solutions that account for the nuances of the new lease accounting standard are ideal.
Bloomberg Tax Fixed Assets software helps users differentiate between operating and finance
leases. It also tracks leased assets by entity and enables grouping and flexible reporting of ROU
assets and lease liability, amortization, and interest expense.
To better comply with ASC 842, software also must enable accountants to centralize all leases
in a single database, automate accounting calculations, and generate key reports so leases can
be properly disclosed on financial statements. Bloomberg Tax’s software accounts for the
nuances of ASC 842 reporting and is nested within a larger suite of fixed asset accounting tools
– Bloomberg Tax Fixed Assets – allowing tax departments to streamline their reporting to one
system and eliminate inefficiencies.
In addition, it is important for companies that report both within and outside of the U.S. to
We,
third
parties, use
cookies
haveand
lease
accounting
software
that is compatible with ASC 842 and International Financial
to
improve Standards
your user experience.
Reporting
(IFRS) 16 – a rule that governs lease accounting standards outside of the
For
more
information,
see ourallows accountants to apply whichever standard they follow to
United States. Our software
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Reference Shelf
Download: Understanding the New Lease Accounting Standard
Read: Lease Accounting Solutions for ASC 842, IFRS 16 & GASB 87
Read: Impairment Considerations When Adopting ASC 842
Read: ASC 842 Lease Accounting Improves Financial Ratios
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