When Was ASC 842 Effective for Public Companies?
Understand the precise implementation timeline and the significant balance sheet impacts of ASC 842 on public company financial reporting.
ASC 842 represents a significant shift in financial reporting, altering how companies account for lease agreements. This standard was introduced to enhance transparency and comparability of financial statements. Its implementation brought new requirements for recognizing lease assets and liabilities, impacting how businesses present their financial health to investors and other stakeholders.
Understanding ASC 842
Accounting Standards Codification (ASC) Topic 842 is the current lease accounting standard issued by the Financial Accounting Standards Board (FASB). It replaced ASC 840, with the goal of increasing transparency. Under ASC 842, companies must recognize nearly all leases on their balance sheets, a major departure from prior practices, where many operating leases were treated as off-balance sheet items.
The standard mandates that lessees recognize a “right-of-use” (ROU) asset and a corresponding lease liability for most lease agreements. A lease is defined as a contract that conveys the right to control the use of an identified asset for a period of time in exchange for consideration. This change provides a more comprehensive view of an entity’s financial commitments, ensuring that lease obligations are clearly reflected on the balance sheet.
Effective Dates for Public Companies
The effective date for ASC 842 differed between public and private companies. Publicly-traded companies, including public business entities and certain public not-for-profit entities, were required to adopt the standard for fiscal years beginning after December 15, 2018. For calendar year-end companies, this meant the standard became effective on January 1, 2019.
The FASB did not grant a general deferral for public companies, unlike subsequent deferrals for private companies due to implementation complexities and the COVID-19 pandemic. Public companies were among the first to navigate the comprehensive changes introduced by ASC 842.
Key Changes for Public Companies
The implementation of ASC 842 brought several significant changes for public companies, impacting their financial statements and disclosures. The most notable change was the mandate to recognize operating leases on the balance sheet. Previously, only capital leases (now termed finance leases) were capitalized, meaning operating lease obligations were largely absent from the balance sheet.
Under the new standard, public companies now record a right-of-use (ROU) asset and a corresponding lease liability for nearly all operating leases. The ROU asset is presented similarly to other long-term assets like property and equipment, while the lease liability is segregated into current and long-term portions. On the income statement, finance leases continue to show separate interest expense and amortization of the ROU asset. For operating leases, a single, straight-line lease expense is recognized over the lease term.
The standard also introduced expanded disclosure requirements, compelling public companies to provide more detailed qualitative and quantitative information in their financial footnotes. These disclosures include:
Descriptions of lease arrangements
Significant judgments made in applying the standard
Breakdown of lease costs
Weighted-average remaining lease terms and discount rates
Maturity analysis of both finance and operating lease liabilities
Supplemental non-cash information related to lease liabilities arising from obtaining ROU assets
These changes necessitated significant operational adjustments for public companies, including identifying embedded leases within contracts and updating internal systems and policies.