Introduction

Starting from January 1, 2022, there’s a new rule for how companies deal with leases called ASC 842. This rule changes how companies look at lease accounting, and it’s different from the old rule, ASC 840.

This new rule affects how companies, especially those with real estate, show their leased places on their financial reports. Now, businesses have to see leases as “right-of-use assets” and “lease liabilities”. This big change means companies must put the value of the leased place and how much rent they owe on their financial reports.

The main goal is to show investors and others a more accurate picture of a company’s financial commitments.

The Impact of ASC 842

For companies involved in real estate leasing, the effect of ASC 842 is significant. Real estate lease agreements usually involve long-term commitments and big financial impacts. In the past, under ASC 840, these leases were seen as “operating leases” and didn’t have to be put on the balance sheet.

But now, with ASC 842, these leases must be listed on the balance sheet as “right-of-use assets” and “lease liabilities”.

In ASC 842, real estate leases are split into two types: finance leases and operating leases.

• Finance leases are capital leases in ASC 840, and are shown as both assets you own and assets you owe money for on the balance sheet.
• Operating leases are listed as “right-of-use assets” and “lease liabilities” on the balance sheet.

Moving to ASC 842 can be a lot of work for companies in real estate leasing. They have to carefully find and put together all the needed info about their leases, including terms, payments, and options.

At the same time, they need to see how this rule affects their financial reports and changes how they do their accounting. Besides the important financial changes from ASC 842, companies also need to think about how they affect their lease agreements more broadly.

The rule says companies must review how they label and guess the time of their leases, and this might lead to changes in the lease agreements.

In Conclusion

To sum up, ASC 842 is a big change in how companies handle lease accounting, especially for those in real estate. This new rule means companies must put leased liabilities and assets on their financial reports, giving a clearer view to investors.

Following ASC 842 needs a lot of work and resources, including finding and putting together lease info, checking how it affects financial reports, and changing how accounting is done.

If dealing with ASC 842 seems hard, think about getting help from CARMEN Corporate Services. We’re experts in corporate real estate and can make the switch to ASC 842 smoother for you. Contact us to learn more.

FAQs

1. What is ASC 842, and how does it differ from ASC 840?

ASC 842 is a new rule for lease accounting that started on January 1, 2022. It’s different from the old rule, ASC 840, as it changes how companies show leases on their financial reports.

2. How does ASC 842 impact companies in real estate leasing?

ASC 842 significantly affects real estate leasing. Previously, leases were often considered “operating leases” under ASC 840 and didn’t need to be on the balance sheet. Now, under ASC 842, leases must be listed as “right-of-use assets” and “lease liabilities.”

3. What are finance leases and operating leases under ASC 842?

Finance leases in ASC 842 are similar to capital leases in ASC 840, showing as both assets and liabilities on the balance sheet. Operating leases are presented as “right-of-use assets” and “lease liabilities.”

4. How does ASC 842 impact the financial reporting of companies?

ASC 842 requires companies to include leased assets and corresponding liabilities on their financial reports, offering a clearer view to investors about a company’s financial commitments.

5. What steps do companies need to take for compliance with ASC 842?

Companies transitioning to ASC 842 must gather detailed lease information, evaluate its impact on financial statements, and adjust accounting practices.

Consider seeking expert assistance, like CARMEN Corporate Services, for a smoother transition.