Quick Fix
To wrap up ASC 842 compliance by 2026, double-check your lease classification under ASC 842-10-25-2. Make sure every lease lasting over a year shows up on the balance sheet as a right-of-use asset and lease liability. Grab a lease accounting tool—like LeaseCrunch or CoStar—or use ERP modules (SAP Lease Administration works) before your fiscal year-end close.
What’s Happening
ASC 842, cooked up by the Financial Accounting Standards Board (FASB), forces lessees to log most operating leases on the balance sheet. Public companies had to start this for fiscal years beginning after December 15, 2018; private companies got until after December 15, 2021—so calendar-year filers were fully in the mix by 2022. This rule replaced ASC 840 to stop companies from hiding operating leases off the balance sheet and to make financial reports clearer. Under ASC 842, a lease is basically a contract that hands you control over a specific asset for a set time in exchange for payment. The lease term covers non-cancellable chunks plus any extensions or terminations you’re pretty sure will happen.
Step-by-Step Solution
- Identify Your Leases
Go through every contract you control as of 2026. Lean on ASC 842-10-15-3 to figure out which ones count as leases. That means real estate, equipment, vehicles—even stuff you used to call an operating lease under ASC 840. - Classify Each Lease
When you kick off a lease, label it as either operating or finance using ASC 842-10-25-2:- Operating Lease: You record one steady lease cost spread evenly over the lease term.
- Finance Lease: You break it into interest expense on the lease liability and amortization of the right-of-use asset.
- Measure the Lease Liability and Right-of-Use Asset
Figure the lease liability by crunching the present value of future payments, discounted with your incremental borrowing rate—or the lessor’s implicit rate if you know it (ASC 842-10-30-5). Record the right-of-use asset for the same amount, but tweak for prepayments, incentives, and any upfront costs. - Record in Financial Statements
Drop the lease liability and right-of-use asset into your general ledger before year-end close. Private companies on QuickBooks or NetSuite can enter this through the fixed asset module or a lease accounting add-on. SAP or Oracle users should use the lease admin module built into the system. - Disclose Requirements
Footnotes need to show lease cost, the weighted-average lease term left, and your discount rate (ASC 842-10-50-2). The FASB website has templates to make this easier.
If This Didn’t Work
- Check Transition Adjustments
If you parked deferred rent under ASC 840, ASC 842 wipes out that account. Reconcile the opening balances so you don’t accidentally double-count lease expenses. A roll-forward schedule comparing ASC 840 to ASC 842 balances helps spot mismatches. - Engage a Specialist
Got a tricky portfolio—say, real estate or aircraft? Bring in a third-party lease abstraction service or a CPA firm that knows ASC 842 inside out. Many of them pull data straight from PDF leases and plug it into your ERP system. - Update Internal Controls
Add new GL accounts for lease liabilities, right-of-use assets, and lease expenses. Tweak your SOX controls so they match the new process for spotting and classifying leases.
Prevention Tips
Don’t let ASC 842 compliance slip in 2026—here’s how to stay ahead:
- Maintain a Central Lease Repository
Keep all lease contracts in one searchable spot—SharePoint, Google Drive, or a lease-specific tool—and set alerts for renewals, terminations, and review deadlines. - Train Finance Teams Annually
Run ASC 842 refresher courses for your accounting crew, especially when people leave or join. The IFRS Foundation and FASB websites have solid updates you can use. - Integrate Lease Management into Procurement
Get your procurement team to flag lease agreements when they draft contracts. Build lease accounting checks into your AP workflows so nothing slips through unrecorded.
