ASC 842 Lease Accounting Explained: Compliance, Recognition, and Reporting
ASC 842 Summary (for Accounting Teams)
ASC 842 is the U.S. lease accounting standard issued by the Financial Accounting Standards Board (FASB). It requires most leases to be recognized on the balance sheet through a right-of-use (ROU) asset and a corresponding lease liability, recorded at the commencement date.
ASC 842 retains two lease classifications: operating leases and finance leases. Both are recognized on the balance sheet, but expense recognition differs. Finance leases generally replace legacy capital lease treatment and result in separate interest and amortization expense. Operating leases typically recognize a single lease cost on a straight-line basis.
ASC 842 applies to both public and private companies and introduces more rigorous requirements around measurement, reassessment, and disclosure to support audit-ready financial reporting.
Prefer a visual walkthrough? Watch our short explainer video below for a clear breakdown of how ASC 842 works in practice, including balance sheet recognition, operating vs finance leases, and common compliance pitfalls.
What Is IFRS and How IFRS 16 Relates to ASC 842
IFRS stands for International Financial Reporting Standards, a global set of accounting standards issued by the International Accounting Standards Board (IASB). IFRS is used by companies that report financial statements outside of U.S. GAAP, including many multinational organizations.
IFRS 16 is the lease accounting standard under IFRS. Like ASC 842, it requires leases to be recognized on the balance sheet through a right-of-use asset and lease liability. However, IFRS 16 uses a single lease model for lessees, meaning most leases are treated similarly to finance leases under U.S. GAAP.
For organizations with international operations, understanding both ASC 842 and IFRS 16 is essential for maintaining consistent lease accounting and audit alignment across jurisdictions.
Lease accounting changed fundamentally with the introduction of ASC 842. For accounting teams managing real estate, equipment, or embedded leases, the standard reshaped how lease obligations are measured, reported, and audited.
What was once largely a disclosure exercise is now a balance sheet–driven accounting process. Under lease accounting ASC 842, nearly all leases must be formally identified, classified, and recorded. This guide explains accounting under ASC 842, including how leases are recognized on the balance sheet, how operating leases and finance leases differ, and what accounting teams need to manage compliance in practice.
Which Companies Must Comply With ASC 842
ASC 842 applies to both public and private companies.
While adoption timelines differed, compliance requirements are the same. Private companies often face additional challenges, including limited accounting resources and reliance on spreadsheets, but are still expected to apply the standard consistently.
Misunderstanding applicability is a common source of audit findings, especially during financing events, acquisitions, or IPO preparation.
How Leases Are Recognized on the Balance Sheet Under ASC 842
Under ASC 842, nearly all leases are recognized on the balance sheet.
At the lease commencement date, a lessee records:
- A right-of-use (ROU) asset
- A corresponding lease liability
The lease liability represents the present value of future lease payments. The ROU asset represents the lessee’s right to control the use of the leased asset over the lease term. This applies to both operating leases and finance leases.
For more detail on how ROU assets function in reporting, see Understanding right-of-use assets in accounting.
The Lease Commencement Date and Why It Matters
The commencement date is the date on which the lessee gains control of the underlying asset. This date determines when a lease must be initially recognized and measured.
Common issues include:
- Using the lease signing date instead of the possession date
- Failing to update commencement dates after construction delays
- Inconsistent application across lease populations
Errors in the commencement date can lead to misstated assets, liabilities, and expense timing.
Operating Leases and Finance Leases Under ASC 842
ASC 842 classifies leases as either operating leases or finance leases. While both are recognized on the balance sheet, expense recognition differs.
Operating Leases
Operating leases typically result in a single lease expense recognized on a straight-line basis over the lease term. The expense is generally presented within operating expenses.
Finance Leases
Finance leases, which replaced capital lease accounting under prior guidance, result in:
- Amortization of the ROU asset
- Interest expense on the lease liability
Although capital lease terminology is no longer used in ASC 842, it still appears in legacy systems and contracts. Accounting teams must correctly map this language to current classifications.
For broader context on lease structures, see The complete guide to commercial lease management.
Initial Measurement of Leases Under ASC 842
At the commencement date, lease liabilities are measured as the present value of future lease payments. This requires determining:
- The lease term
- Fixed and variable lease payments
- Renewal options reasonably certain to be exercised
- The appropriate discount rate
The ROU asset is generally measured as the lease liability, adjusted for initial direct costs and lease incentives.
Accurate and well-documented assumptions are critical for audit support.
Ongoing Lease Accounting and Reassessment
Lease accounting under ASC 842 requires ongoing monitoring. Accounting teams must reassess leases when triggering events occur, such as:
- Lease modifications
- Changes in lease term assumptions
- Early terminations
- Asset impairments
Each reassessment may require remeasurement of both the lease liability and the ROU asset. Manual tracking significantly increases the risk of error.
Disclosure Requirements Under ASC 842
ASC 842 expanded disclosure requirements beyond balance sheet recognition. Financial statements must include:
- Quantitative information about lease costs
- Maturity analyses of lease liabilities
- Weighted-average lease terms and discount rates
- Qualitative descriptions of leasing activity
Producing these disclosures consistently is challenging without centralized lease data.
Common ASC 842 Challenges for Accounting Teams
Even compliant organizations often struggle operationally. Common challenges include:
- Incomplete lease populations
- Spreadsheet-based amortization schedules
- Inconsistent discount rate methodologies
- Difficulty responding to audit requests
- Limited visibility across departments
As portfolios grow, these issues compound and extend close timelines.
Why Many Teams Use Lease Accounting Software for ASC 842
Given the complexity of accounting under ASC 842, many accounting teams rely on lease accounting software to support compliance.
Purpose-built systems help:
- Centralize lease data
- Automate calculations
- Track modifications and reassessments
- Generate audit-ready reports
For signs your team may be outgrowing manual processes, see 5 signs your company needs lease management software.
ASC 842 vs IFRS 16: Key Takeaways
While ASC 842 and IFRS 16 differ in structure, both standards aim to improve transparency by bringing lease obligations onto the balance sheet.
Successful compliance depends on:
- Accurate lease identification
- Proper classification
- Consistent measurement
- Strong documentation
These fundamentals apply regardless of reporting framework.
ASC 842 FAQs for Accounting and Finance Teams
What is ASC 842 lease accounting?
ASC 842 is a U.S. accounting standard that requires leases to be recognized on the balance sheet through a right-of-use asset and lease liability.
Are operating leases recognized on the balance sheet under ASC 842?
Yes. Both operating leases and finance leases are recognized on the balance sheet under ASC 842.
What is the difference between operating leases and finance leases?
Operating leases generally recognize a single lease expense, while finance leases recognize separate interest and amortization expense.
Is ASC 842 required for private companies?
Yes. ASC 842 applies to both public and private companies.
What replaced capital lease accounting?
Capital leases were replaced by finance leases under ASC 842.
Why is the lease commencement date important?
The commencement date determines when lease assets and liabilities are first recognized and measured.
Final Thoughts
ASC 842 and IFRS 16 transformed lease accounting into a balance sheet–centric discipline. For accounting teams, compliance requires accurate data, consistent processes, and defensible reporting.
As lease portfolios grow and scrutiny increases, effective lease accounting becomes a core financial reporting responsibility rather than a one-time compliance exercise.
Brooke Colglazier
Marketing Manager