When Is ASC 842 Effective for Public & Private Entities?

The Financial Accounting Standards Board (FASB) issued Accounting Standards Codification (ASC) 842, a new lease accounting standard, to enhance transparency in financial reporting. This standard replaced ASC 840 and fundamentally changed how organizations account for leases. Its primary objective is to bring most lease assets and liabilities onto company balance sheets, providing a clearer picture of an entity’s financial obligations. This shift aims to give investors and other stakeholders a more complete understanding of a company’s financial health.

Effective Dates for Public Entities

For public business entities, the original effective date for ASC 842 was for fiscal years beginning after December 15, 2018. This also included interim periods within those fiscal years. This means that for a public company operating on a calendar year-end, the new standard became effective on January 1, 2019. Certain not-for-profit entities that have issued or are conduit bond obligors for securities traded on an exchange or over-the-counter market, and employee benefit plans that file financial statements with the SEC, also followed this same timeline.

Effective Dates for Private Entities and Non-Public Employee Benefit Plans

The timeline for private entities and non-public employee benefit plans was initially set for fiscal years beginning after December 15, 2019. However, the FASB recognized the complexities of implementation, and issued Accounting Standards Update (ASU) 2019-10 in November 2019, which deferred this effective date.

Subsequently, in response to the operational and financial disruptions caused by the COVID-19 pandemic, the FASB issued ASU 2020-05. This further deferred the effective date for private companies and non-public not-for-profit organizations. The final effective date for these entities was set for fiscal years beginning after December 15, 2021, with interim periods within fiscal years beginning after December 15, 2022. Therefore, a private company with a calendar year-end adopted ASC 842 on January 1, 2022.

Understanding the Transition

The “effective date” of ASC 842 signifies the point from which the new accounting guidance must be applied to an entity’s financial reporting. The standard applies to fiscal years beginning after the specified date, meaning financial statements prepared for periods starting on or after that date must conform to ASC 842. Companies generally adopted the standard using a modified retrospective approach. This approach allows entities to apply the new guidance as of the effective date, recognizing a cumulative-effect adjustment to equity on the adoption date, rather than restating all prior comparative periods.

Entities needed to identify all their lease agreements, including those embedded within other contracts, and gather relevant data for each. Implementing necessary system or process changes was also crucial to ensure accurate data capture and compliance with the new recognition and measurement requirements.