When Did ASC 842 Officially Go Into Effect?

Accounting Standards Codification (ASC) 842, issued by the Financial Accounting Standards Board (FASB), represents a significant shift in how companies account for leases. This standard, also known as Topic 842, replaced the previous guidance, ASC 840. Its primary purpose is to enhance transparency regarding lease obligations by requiring organizations to recognize most leases on their balance sheets, thereby reducing off-balance-sheet financing practices.

Key Effective Dates

The effective dates for ASC 842 varied based on the type of entity. Public business entities were required to transition to the new standard for fiscal years beginning after December 15, 2018. This meant that for companies with a calendar year-end, the standard became effective on January 1, 2019.

Private companies and not-for-profit entities faced a different timeline. Their original effective date was for fiscal years beginning after December 15, 2019. However, the FASB deferred this date twice.

Following these deferrals, the final effective date for private companies and not-for-profit organizations was set for fiscal years beginning after December 15, 2021. Therefore, private companies and not-for-profit organizations with a calendar year-end adopted ASC 842 on January 1, 2022.

Core Changes Introduced

ASC 842 fundamentally changed lease accounting by requiring lessees to recognize all leases on their balance sheets. Previously, many operating leases were only disclosed in footnotes to financial statements. Now, these leases must be recorded as right-of-use (ROU) assets and corresponding lease liabilities.

A right-of-use asset represents a lessee’s right to control the use of an underlying asset for the lease term. The lease liability represents the present value of the future lease payments. While both finance leases and operating leases are now recognized on the balance sheet, their treatment on the income statement differs. For finance leases, interest expense on the lease liability and amortization of the ROU asset are recognized, while for operating leases, a single lease expense is recognized on a straight-line basis over the lease term.

Transition Methods for Adoption

Companies adopted ASC 842 using a “modified retrospective approach.” This method allowed organizations to apply the new lease accounting guidance either as of the effective date or at the beginning of the earliest comparative period presented in financial statements.

Companies could elect to apply the new guidance from the effective date, recognizing the cumulative impact on their balance sheets at that point without restating prior periods. Alternatively, they could apply it retrospectively to all periods presented. To simplify the transition, the FASB provided practical expedients. These included not reassessing whether existing contracts contained leases, not reassessing lease classification for existing leases, and not reassessing initial direct costs for existing leases.