When Did ASC 842 Become Effective?

ASC 842, also known as Topic 842, is a lease accounting standard issued by the Financial Accounting Standards Board (FASB) that significantly changed how companies recognize, measure, and present leases on their financial statements. This standard replaced ASC 840 and fundamentally altered lease accounting practices under US Generally Accepted Accounting Principles (GAAP). The primary objective of ASC 842 was to increase transparency and comparability across organizations by requiring lessees to recognize most leases on their balance sheets, addressing previous off-balance sheet financing concerns. This improved visibility helps investors and other stakeholders better understand an entity’s true financial position and lease obligations.

Effective Dates for Public Business Entities

Public business entities had an earlier effective date for ASC 842. Publicly traded companies, including SEC filers and certain employee benefit plans, were required to transition to the new standard for fiscal years beginning after December 15, 2018. This meant that a calendar year-end public company adopted the standard on January 1, 2019.

Effective Dates for Private Entities and Not-for-Profit Organizations

The original effective date for private companies and not-for-profit organizations was set for fiscal years beginning after December 15, 2019. However, the FASB subsequently deferred this date multiple times, influenced by feedback on implementation complexities and the COVID-19 pandemic, to provide smaller entities more time to prepare. Consequently, the final effective date for private companies and not-for-profit organizations was fiscal years beginning after December 15, 2021. For a calendar year-end private company or not-for-profit organization, this meant the standard became effective on January 1, 2022.

Transition Guidance and Initial Application

Entities transitioning to ASC 842 applied a modified retrospective approach. This method involved applying the new standard as of the effective date or the earliest period presented. Under this approach, companies recognized a right-of-use (ROU) asset and a corresponding lease liability on their balance sheets for nearly all leases. The ROU asset represents the lessee’s right to use the underlying asset, while the lease liability reflects the financial obligation for future lease payments.

To ease the transition process, the FASB provided several practical expedients that entities could elect. One common expedient allowed entities not to reassess whether existing or expired contracts contained leases, their classification, or initial direct costs. Electing these expedients simplified the initial application by reducing the need to re-evaluate past accounting conclusions. For example, existing leases classified as operating leases could retain that classification under ASC 842 if the expedient was elected. Another practical expedient permitted the use of hindsight when determining the lease term.