Everything You Need To Know About ASC 842 Lease Accounting

ASC 842 is a new standard that went into place for public companies at the end of 2018 and for private companies on Dec. 15, 2021. This new requirement specifies that businesses must record leases and service agreements on their balance sheets, making these financial obligations more visible. ASC 842 also aligns more closely with the international lease accounting standard IFRS 16, which should make financial reporting simpler and more consistent for companies that operate both in the U.S. and abroad.

What Is the FASB ASC?

The FASB, or Financial Accounting Standards Board, is a private body that establishes Generally Accepted Accounting Principles, or GAAP, for companies operating in the United States. It previously relied upon the States of Financial Accounting Standards, or SFAS, which included 168 standards. The FASB has since converted to the ASC or Accounting Standards Codification.

The codification is the result of a five-year collaboration of over 200 individuals. The ASC is notably different from previous standards, as it organizes the thousands of individual U.S. standards into about 90 topics. This codification aims to simplify access to U.S. GAAP, representing all GAAP implemented since July 1, 2009. 

What Is ASC 842?

ASC 842 is a new standard that supersedes ASC 840. Also known as Topic 842, this lease accounting standard addresses how financial and accounting reporting must address leases. ASC 842 aims to streamline the accounting process for all leases, and it provides greater transparency for all lease arrangements. Prior to ASC 842, many leases and service agreements were essentially invisible to banks, lending institutions, investors, and buyers. ASC 842 sets forth specific lease accounting standards that require companies to include right-of-use or ROU, assets, and liabilities for nearly all types of leases on their balance sheets.

Prior to ASC 842, only capital leases were required on balance sheets. Under the new guidance, these capital leases that represent purchase agreements are now referred to as finance leases. Additional lease types — including those for office and IT equipment, construction equipment, vehicles, real estate leases, and other assets — must now appear on the balance sheet as well. This necessitates a number of periodic entries.

Under ASC 842, a lease is any contract or element of a contract that conveys ROU of a physically distinct asset for a specific period in exchange for a payment. This period may reflect a set time frame, such as a monthly or yearly lease, or it may refer to the amount of use for a piece of equipment, such as the production of a certain number of units.

Automating Compliance With ASC 842

Acumatica and Dynamics 365 offer add-ons designed with ASC 842 in mind. These automate the management of leases and agreements, keeping all the essential information pertaining to these accounts in one place. Acumatica integrates seamlessly with other financial systems to make it easy for businesses to stay in compliance with ASC 842 with as little time and effort as possible.

Implementing a streamlined finance software product like Acumatica and Dynamics 365 Finance and Operations/Supply Chain can make it easier for businesses to incorporate the new method of lease management required by ASC 842. As an ERP leader, Acumatica is well-poised to provide the support and functionality needed to stay compliant with all GAAP. 

For a better understanding of ASC 842, be sure to tune into our webinar on Mar 31, 2022. Contact Clients First Business Solutions today for more information on how ERPs can help your business.