ASC 842
ASC 842 is the section of US accounting standards that covers leases. For most leases, it asks the tenant to show the lease on its balance sheet.
The tenant records a right to use the space or equipment, and a matching obligation to pay for it.
This entry is part of the Fairview Audit glossary. Fairview does no accounting work. The entry only explains the term, so you can talk with your accountant and with partner firms.
Why ASC 842 matters in a cost review
ASC 842 is an accounting rule, not a billing rule. It does not tell a landlord what to charge. It does tell you how to record the lease, and that record depends on facts taken from the lease: the term, the payments, any options to renew or end early, and the dates.
If those facts are wrong, the accounting is wrong too. A lease that was read incorrectly may produce a balance sheet entry that does not match the contract. A cost review that checks the lease against what was billed often finds the same facts the accounting depends on. Partner firms in our network offer help under accounting and valuation support and lease accounting under ASC 842.
A plain-words illustration
Imagine a business that rents office space and a fleet of delivery vans. Before the standard, many of these arrangements appeared only as a rent expense. Under ASC 842, the business records a right-of-use asset and a lease liability for most of them.
The business also decides whether each lease is a finance lease or an operating lease. That choice affects how the cost appears in the income statement over time. The classification rules are set in the standard itself, so your accountant applies them to each lease. [VERIFY: confirm current classification criteria and any exemptions in the published standard]
How it shows up in a review
Lease accounting and cost reviews touch each other in a few places.
- Lease terms. The lease end date, renewal options and early exit rights feed into how the term is judged. A lease abstract collects these in one place.
- Payment amounts. Fixed payments, scheduled increases and other amounts in the lease go into the calculation. An error in what was billed can point to an error in what was recorded.
- Changes over time. An amendment, an extension or a termination can require the accounting to be updated.
- Records. Auditors and accountants ask for the contract and its support, which are the same documents a cost review uses.
A partner firm may also help with conversion work, where a business moves from old lease records to the new treatment. What a given firm offers is for the firm to confirm. [CONFIRM: a partner firm supplies and approves what it offers for lease accounting]
Common mistakes
- Treating it as a software problem only. Software can calculate, but it relies on the inputs. Check the inputs against the contracts.
- Missing leases. Equipment, vehicles and storage leases are sometimes left out of the list.
- Not updating after changes. Amendments, extensions and early exits need to reach the accounting team.
- Mixing up what is billed and what is recorded. The invoice and the accounting entry answer different questions.
- Treating the standard as the same everywhere. Other reporting frameworks handle leases differently. [VERIFY: confirm which framework applies to your business and any private company elections]
Note: This entry is general information and not accounting advice. Your accountant decides how the standard applies to your business.
Related terms and pages
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