Understanding the ASC 842 lease accounting standard

The Committee on Accounting Procedure determined that operating lease accounting shouldn’t be used for long term leases. They issued the bulletin, Disclosure of Long-Term Leases in Financial Statements of Lessors, which required finance leases to be recorded as a leased asset and long-term liability. However, since capitalization was not required by GAAP, most lessees still used off-balance lease reporting.

The Accounting Principles Board issued Reporting of Leases in Financial Statements of Lessees which established that leases should be categorized as finance if the contract has a nominal purchase option.

The Accounting Principles Board issued Accounting for Leases in Financial Statements of Lessors which issued different criteria for finance lease identification than the 1964 opinion.

The SEC asked the FASB to create comprehensive lease accounting rules. They issued FAS 13, Accounting for Leases. This standard has been in place since 1976, though it has been amended multiple times since then.

The Group of Four Plus One (G4 + 1) which includes Australia, Canada, New Zealand, the United Kingdom, and the United States plus the IASB published a discussion paper for a converged standard for lessees which called for the elimination of operating leases.

G4 + 1 began work on a converged standard for lessors building on the 1996 discussion paper.

The Enron Scandal took place causing the SEC to investigate accounting practices that could allow corporate fraud. At this point, the SEC discovered the off-balance sheet operating lease loophole.

FASB began work on a new lease accounting standard intended to close the loophole of off-balance operating leases.

The FASB and IASB issued a Discussion Paper proposing that lessees capitalize all leases on the balance sheet.

The FASB and IASB issued an Exposure Draft and distributed it for public comments. The model set forth in the ED proposed that lessees move all leases onto the balance sheet as a right-of-use asset and liability. Lessees, lessors, and the accounting community in general reacted negatively to the ED because they felt the proposal was overly complex and lacked consistency.

After multiple discussions, meetings, and revisions, The FASB and IASB issued a Revised Exposure Draft, and opened a four month comment period. After, the boards solidified parts of the standard, including that all leases would be brought onto the balance sheet (except short-term leases), expense recognition models, and liability measurement.

The FASB published ASC-842, the new lease accounting standard for companies report- ing under US GAAP. The IASB issued IFRS 16 (eIFRS login required), the new lease ac- counting standard for companies reporting under the International Financial Reporting Standards.

The FASB issued an update to ASC 842 to both clarify and simplify the application of the new lease standard to land easements. The FASB also issued a proposal to ease companies’ transition to the new standard by offering a practical expedient that would allow companies to apply the transition provisions at the adoption date, instead of at the earliest comparative period. The proposal was approved in July of 2018. Also in July, the FASB issued codification improvements affecting narrow aspects of the standard.

The FASB issued codification improvements to ASC 842 in March that covered fair value, statements of cash flows, and transition disclosures.

Due to COVID-19 market disruptions, the FASB modified compliance deadlines for private and select not-for-profit organizations, pushing them out by one year. The earliest deadline is for those whose year-end is December 31 – they will need to transition to the standard by January 1, 2022.