Accounting for Leases Under ASC 842
Accounting for leases can be complex. Make sure you get it right using BDO's "Blueprint" publication.
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BDO's Professional Practice publication (Blueprint) guides professionals through the application of the FASB’s Accounting Standards Codification Topic 842, Leases (“ASC 842” or “leases guidance”). Summarizing key aspects of ASC 842, this Blueprint helps all companies, public or private, understand and comply with the leases guidance.
This Blueprint was updated in January 2025 to add BDO’s views on several practice issues. Significant changes to this update are listed in Appendix B.
This Blueprint includes practical examples and interpretive guidance to assist companies and practitioners in their continued application of ASC 842. Divided into chapters focused on key aspects of the leases guidance, this Blueprint is organized in the order an entity applies ASC 842 and the corresponding questions the entity needs to address.
Scope of ASC 842
First things first: An entity needs to determine whether a contract is within the scope of ASC 842, which entails understanding the scope exceptions and the interaction with other U.S. GAAP. Then the entity can proceed with examining other key aspects of the leases guidance.
Identifying a Lease
If a contract is in scope, then the next step is to determine whether the contract is or contains a lease (that is, whether ASC 842 or other U.S. GAAP applies). While this might sound simple, there are important nuances in this process.
Identifying and Separating Components
Even if a contract contains a lease, it does not mean the whole contract is accounted for under ASC 842. Identifying the units of account, or components, in that contract is important. The leases guidance generally applies only to lease components.
Lease Classification and Key Terms
To properly apply ASC 842, it’s important to understand key terms, such as the commencement date, lease term, lease payments, discount rate and more. These terms are used to classify a lease and to apply other aspects of ASC 842.
Accounting for Leases — Lessees
Once a lessee has determined lease classification, the lease generally is recognized and measured on balance sheet at the commencement date. However, there are also important “day 2” requirements to consider.
Accounting for Leases — Lessors
The accounting by lessors varies depending on lease classification. Key aspects of lessor accounting are also aligned with the revenue standard. The accounting for lessors is all in the details.
Other Topics
Other topics discussed in this Blueprint include the accounting for specific transactions (such as sale and leaseback transactions, and subleases) and the interaction between lease accounting and other areas of U.S. GAAP, including the accounting for leases in a business combination and income taxes.
Presentation and Disclosures
ASC 842 includes enhanced disclosure requirements, including an overall disclosure objective and expanded disclosure requirements for leases. The more extensive the entity’s leasing activities, the more comprehensive the disclosures are expected to be.