New lease accounting standards have changed how companies must report leases on their financial statements. If your business leases equipment, it’s critical to understand how these lease accounting changes—especially ASC 842—affect your balance sheet, reporting requirements, and compliance obligations.
What is ASC 842 and how does it affect lease accounting?
ASC 842 requires most leases to be recorded on the balance sheet as a right-of-use asset and a lease liability, increasing transparency and accuracy.
ASC 842 is the updated lease accounting standard issued by the Financial Accounting Standards Board (FASB). It replaces the older ASC 840 standard and applies to both public and private companies.
Key goal: Increase transparency by requiring companies to report nearly all leases on the balance sheet, even operating leases.
Public companies: Effective for fiscal years starting after Dec 15, 2018
Private companies: Effective for fiscal years starting after Dec 15, 2021
If your business hasn’t fully adopted it yet—you’re required to now.
| Area | Before (ASC 840) | Now (ASC 842) |
|---|---|---|
| Operating Leases | Off balance sheet | On balance sheet as right-of-use asset/liability |
| Capital Leases | Already on balance sheet | Renamed to “Finance Leases” |
| Disclosures | Basic footnote disclosure | Expanded qualitative and quantitative disclosures |
| Lease Classification | Capital vs. Operating | Finance vs. Operating (definitions adjusted) |
Even if you previously treated an equipment lease as an operating expense, under ASC 842 it now appears as:
Right-of-use (ROU) asset
Lease liability
This affects your debt-to-equity ratio, current ratio, and possibly your ability to secure loans.
Even with new balance sheet rules, the income statement treatment remains similar:
Operating leases: Recognized as a straight-line lease expense
Finance leases: Include interest and depreciation separately
Related: The Impact of Equipment Leasing on Your Financial Statements
ASC 842 requires detailed reporting of:
Lease terms and renewal options
Discount rates used
Variable lease payments
Asset classification and location
Missing this data could lead to compliance risk or audit flags.
Good news: Short-term leases don’t need to be capitalized. This allows flexibility for businesses with seasonal or short-duration needs.
✅ Review all active equipment leases
✅ Classify leases accurately (finance vs. operating)
✅ Capture key data points: terms, payments, renewal clauses, asset details
✅ Use lease accounting software if managing multiple leases
✅ Consult a CPA or accounting advisor to ensure full compliance
ASC 842 has made lease accounting more complex—but also more transparent. If your business leases equipment, understanding these changes is crucial for financial accuracy, lender trust, and audit readiness.
Don’t wait until year-end to deal with lease accounting compliance.
Review your current leases, evaluate how ASC 842 applies, and talk to an accounting expert to stay on the right side of the standard.
Compliance starts with clarity.