New Guidance on Accounting for Leases—Difference Between ASC 842 and 840 (Part I)

This article is the first in a series exploring the new guidance on accounting for leases (ASC 842) issued by the Financial Accounting Standards Board (“FASB”) in February 2016. This article discusses the scope of ASC 842 and highlights ways in which conclusions on whether an arrangement is, or contains, a lease could differ from the conclusions reached under the existing guidance in ASC 840.

Subsequent articles will address recognition (including issues around lease classification), initial and subsequent measurement, disclosures and transition.

ASC 842 is effective for fiscal years beginning after Dec.15, 2018 (i.e., Jan.1, 2019, for a company with a calendar year end), including interim periods within those fiscal years, for public business entities; not-for-profit entities that have issued, or are a conduit bond obligor for, securities that are traded, listed or quoted on an exchange or an over-the-counter market; and employee benefit plans that file financial statements with the Securities and Exchange Commission. For all other reporting entities, ASC 842 is effective for fiscal years beginning after Dec. 15, 2019, and is effective for interim periods within fiscal years beginning after Dec.15, 2020. Early adoption of ASC 842 is permitted.

ASC 842, which was issued in February 2016, significantly changes the accounting for leases by lessees—at least with respect to the presentation of assets and liabilities associated with leases classified as operating leases under the current guidance, ASC 840. However, adopting the new guidance will not be as simple as recognizing an asset and liability for operating leases because, in addition to changing how lessees account for operating leases, FASB also changed how leases are identified. ASC 842 defines a lease as—a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment (an identified asset) for a period of time in exchange for consideration.