The new Federal Accounting and Standards Board (FASB) lease accounting standard, ASC 842, requires companies to capture and report on their leased assets. As a result, this improves transparency regarding company leasing obligations.

But how are leases properly accounted for within ASC 842 journal entries? ASC 842 contains many major nuances your company needs to adapt to.

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How does ASC 842 effect journal entries?

Due to the new standards, all leased assets (except short-term leases, 12 months or less) are required to be recorded on the balance sheet as an asset and liability.

To determine the proper lease accounting treatment within the journal entries, leases must be classified as an operating lease or a finance (formerly capital) lease.

Operating Leases:

A lease that provides lessee with control over use of underlying asset without ownership

ASC 840

  • Unrecorded obligations

ASC 842

  • Recorded on balance sheet as ROU asset and lease liability

Finance Leases:

A lease that is effectively a purchase agreement

ASC 840

  • Recorded on balance sheet as Capital Lease Asset and Capital Lease Liability
  • Residual Value Guarantee included in minimum lease payments
  • Probable amount owed not considered

ASC 842

  • Recorded on balance sheet as ROU Asset and Lease Liability
  • Residual Value Guarantee only used in lease type test
  • Probable amount owed used in minimum lease payments

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