How Will Lease Accounting Under FASB ASC 842 Affect Your Balance Sheet?

The key principle of the Financial Accounting Standards Board’s (FASB) recent ASC 842 lease accounting pronouncement is that all leases create an asset and a liability for the lessee. Prior “off-balance-sheet” items will now appear on the balance sheet, which includes right-of-use assets and lease liabilities. Conversely, the accounting applied by a lessor is largely unchanged from U.S. generally accepted accounting principles (GAAP).

Specialty contractors are typically tasked with executing specific functions related to their trade in support of a larger project at the direction of a general contractor. What should these trade contractors consider when they are implementing ASC 842?

Identify Existence of a Lease

A lease under ASC 842 can be a specific physical identifiable asset in a lease or an identified asset embedded in an arrangement that appears to be a supply arrangement or service contract. Therefore, it is possible that not all leases under ASC 842 will be called a lease. 

An agreement is or includes a lease if the agreement conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. A period of time may be described in terms of the amount of use of an identified asset (for example, the number of production units that an item of equipment will be used to produce). Therefore, consider all the terms of an arrangement when determining whether it contains a lease. 

When reviewing your lease population, identify both operating and finance leases (formerly capital leases). Consider your entity’s overall implementation of, or compliance with, ASC 842. As a starting point, look to the disclosures included in your financial statements to identify leases. Then evaluate these additional lease population considerations:

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About the Author

Michael Westervelt

Michael A. Westervelt is a principal with CLA with over 25 years of experience and a past Chairman of the AICPA’s PCPS Technical Issues Committee (TIC).

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