ASC 842 Short-term and Month-to-month Leases

How ASC 842 Treats Different Lease Terms

Organizations are increasingly seeking flexible lease options, with short-term leases, leases with a maximum term of 12 months or less, becoming more popular. Lease accounting standards treat different lease lengths differently, which directly impacts how they appear in financial statements.

Under ASC 842, lease term affects whether a lease may qualify for the short-term lease exemption and how it should be accounted for. This is especially important for organizations managing short-term and month-to-month leases, where renewal timing and lease strategy can directly affect compliance.

Under the ASC 842 requirements, lease length drives how a contract must be classified and accounted for. Below, we explain how ASC 842 applies to short-term leases, month-to-month leases, and leases that extend beyond 12 months.

What is a lease term under ASC 842?

For ASC 842 purposes, lease term is not just the stated contract length. It includes the noncancelable period of the lease, plus any renewal periods the lessee is reasonably certain to exercise and any termination periods the lessee is reasonably certain not to take.

That distinction matters because a lease that looks short on paper may still need to be accounted for beyond the short-term lease exemption if the expected lease term exceeds 12 months.

Lease Lengths Defined Under ASC 842

For organizations that must comply with ASC 842, lease classifications are based on contract duration. The standard defines three common lease lengths:

• Short-term leases last 12 months or less. These may qualify for the short-term lease practical expedient, which allows companies to exclude them from the balance sheet.
• Long-term leases extend beyond 12 months and require recognition of right-of-use assets and lease liabilities.
• Month-to-month leases continue without a set expiration date until canceled by either party, and are generally treated as short-term arrangements for accounting purposes.

Comparing Short-Term, Long-Term and Month-to-Month Leases

ASC 842 Short-term Lease Accounting

Under ASC 842, the “short-term” lease designation can be applied to an entire class of leases rather than on a lease-by-lease basis. By electing this practical expedient, short-term leases do not need to be reported on the balance sheet. This and other practical expedients simplify the lease classification process and help organizations more easily adhere to the new lease standard.

That means when you are first classifying and entering your leases into a lease management system, you should decide up front whether all leases of a particular asset class will be designated as short-term leases. For example, you might decide to treat all real estate leases or all equipment leases (or a particular type of equipment, such as copiers) of one year or less as short-term leases. For example, an organization may elect the short-term lease exemption for a class of equipment leases that meet the required criteria.

What happens when a short-term lease is renewed?

Just like long-term leases, short-term leases can be renewed by exercising an option or negotiating a new contract. However, exercising an option or extending the length of a short-term lease is tricky because it can affect the “short-term” classification. Consider two common scenarios:

• Scenario 1: A one-year lease with a renewal option exercised three months before expiration extends to 24 months. This exceeds the short-term threshold and must be reclassified as a long-term lease.
• Scenario 2: A one-year lease renewed only at the end of the term may be treated as a new, separate short-term lease. In this case, an organization could occupy the same space for multiple years while recognizing successive short-term leases.

Because renewal timing impacts classification, organizations must track lease dates closely to avoid compliance issues. A lease management software such as Visual Lease makes it easy to set up fields for different asset classes (such as real estate and equipment) and select which (if any) should be treated as short-term leases. With all your lease information in the system, the Visual Lease platform can then automatically determine which leases meet the short-term lease criteria based on the designated asset classes and contract dates and properly report the expense.

ASC 842 Month-to-Month Lease Accounting

Sometimes organizations allow existing leases to become month-to-month to delay decisions about long-term commitments. Ideally, an organization would have a minimum number of these leases and manage them strategically — making a conscious decision to go month-to-month for a limited time only.

Why organizations use month-to-month leases

Organizations may have month-to-month leases because renewals were not completed on time or sometimes the organization does not have a good strategy for replacing month-to-month leases and ends up continuing them “by default” rather than by choice. These arrangements are often used during holdovers, active negotiations, or temporary periods of uncertainty

Are month-to-month leases considered short-term under ASC 842?

Month-to-month leases are often treated as short-term for accounting purposes, but they are not automatically exempt. If the facts suggest the lessee is reasonably certain to continue using the asset beyond 12 months, the lease term may exceed 12 months for ASC 842 purposes.. To remain compliant, organizations must be able to:

• Update lease records quickly
• Track rent and holdover charges
• Report expenses accurately in disclosure reports

With Visual Lease software, you can change the status of a month-to-month lease at any time. Lease management and accounting software lets you easily modify lease information, change the commencement date and add a forecasted expiration date and other data to create a new schedule and calculations for month-to-month tenancy.

Visual Lease also makes it easy to track the dollars associated with a month-to-month lease, including any rent that applies during a holdover as well as straight-line rent expenses. The system can even identify month-to-month leases and show them as short-term lease expenses in disclosure reports.

Managing lease terms strategically

By understanding how the different lease terms are defined, you can more simply manage them in a strategic way.

Using a lease management software platform like Visual Lease allows your organization to strategically manage lease terms by:

• Applying consistent treatment to leases according to classification, asset class and any practical expedients that are elected
• Providing tools for creating, tracking, reporting and analyzing lease terms and costs
• Alerting decision makers about critical lease dates and deadlines for exercising lease options and renewals

With the right tools, organizations can make more informed decisions about when to commit to long-term agreements, use short-term flexibility, or strategically manage month-to-month leases.

Learn more about how to account for different lease terms from one of Visual Lease’s in-house experts. Check out our on-demand webinar Managing Short-Term, Long-Term and Month-to-Month Leases (and Everything in Between).