Lease accounting under ASC 842

Under the current US lease accounting standard, most leases appear on the balance sheet. Getting the numbers right takes accurate lease data and careful judgment.

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Fairview Audit connects you with a partner firm that performs lease accounting implementation and review. Fairview does not do the accounting itself.

What the work looks at

ASC 842 is the FASB lease standard for US reporting. In general terms, a lessee records a right-of-use asset and a lease liability for most leases. Leases of 12 months or less may be exempt if the lessee elects that policy. Each lease is classified as an operating lease or a finance lease. A finance lease splits expense into amortization and interest, while an operating lease shows a single straight-line expense. [VERIFY: current ASC 842 recognition, classification and short-term exemption rules]

A partner firm may help in several ways.

  • Building a complete inventory of your leases, including embedded leases in service contracts
  • Abstracting key terms such as dates, payments, renewal options and escalations
  • Judging the lease term and the discount rate
  • Calculating the liability and the asset
  • Preparing journal entries and a disclosure draft
  • Reviewing calculations already done in a spreadsheet or lease system
  • Checking that your numbers agree with what the lease says and what you were billed

That last point connects to lease review work. A lease audit compares billing with lease terms, and clean data helps both efforts. Some firms also help convert records from the old standard. [CONFIRM: a partner firm supplies and approves the lease accounting work it offers]

What you provide

Your partner firm will start with your leases and your current accounting.

  • Every lease, with amendments, side letters and renewal notices
  • A list of equipment, vehicle and real estate leases
  • Service contracts that may contain a right to use an asset
  • Current lease schedules and payment records
  • Your accounting policies for leases
  • Borrowing information used for discount rates
  • Prior financial statements and lease disclosures
  • Contact details for facilities, procurement and finance staff

Leases are often held by different departments. Collecting them in one place is usually the longest step.

What happens after you submit a request

  1. You submit a request on the path that fits your business.
  2. A partner firm contacts you to learn which standard applies to you and what stage you are at.
  3. You agree on scope. The work may be a first implementation, a clean-up or a review of existing entries.
  4. You share your leases and data, and your team stays involved because only you know how each space or asset is used.
  5. The partner firm reports its findings and delivers its work product to you.

The engagement and any fees are between you and the partner firm under the firm's own terms.

Who it suits and how matching works

This service suits controllers and finance leads at businesses that lease property, vehicles or equipment, and at companies that have a lender or auditor asking about lease balances. It also suits businesses that adopted the standard and now doubt their numbers.

Fairview offers three request paths: larger business, smaller business, or not sure or another need. There is no fixed size cut-off. Fairview matches each request by hand. Each path leads to its own form: larger business, smaller business or not sure. Your request goes to the matched partner firm, or to Fairview for manual matching on the not sure path. You then talk with the firm directly.

Who does the work

An independent partner firm that specializes in Lease accounting under ASC 842 handles this work. Fairview Audit makes the match. We do not perform the review ourselves.

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Frequently asked questions

Does ASC 842 apply to my business?

It applies to US companies and organizations that lease assets, including private companies and not-for-profits. A partner firm can check how it applies to you.

Do we have to record every lease?

Not always. Short leases may be exempt if you elect that policy, and each entity sets policies within the rules.

Who decides the discount rate?

Management decides, using the rate implicit in the lease if known, or otherwise its incremental borrowing rate. Private companies may have a simpler option. A firm can help you support the choice.

Will this change our covenants?

It can. Check your loan agreements and talk to your lender early.

Related pages

Find out what you are overpaying.

Tell us what you need reviewed. We match you by hand with an independent partner firm. You keep your existing vendors.

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