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Under the new lease standard, all leases must be recognized as both an asset and offsetting liability for future lease payments. One key to knowing that you have a lease rather than another type of contract is whether you have the right to control or use an asset, also called the right-of-use, or ROU Asset.

Impact on lessee accounting ASC 842 retains the two-model approach to classifying leases as operating or finance leases (formerly, capital leases); however, most leases, regardless of classification type, are recorded on the balance sheet.

According to the FASB, the scope of ASC 842 applies to leases of property, plant or equipment.

What Does ASC 842 Mean for You? ASC 842 requires organizations with lease assets to recognize nearly all leases as assets and liabilities, whether classified as operating leases or financing leases, subject to certain exemptions.

The new standards specifically require that operating leases of 12 months or more must be reflected on the balance sheet as both assets and liabilitieseven if the lessee's intent is to return the asset to the owner or landlord.

Lease classification Application of ASC 842 results in lessees classifying their leases (or separate lease components) as either financing or operating leases and lessors classifying their leases (or separate lease components) as sales-type, direct-financing or operating leases.

Multiply each lease liability balance by the corresponding remaining lease term. This amount is then divided by the sum of the lease liability at year-end to arrive at the weighted-average remaining lease term for both operating and finance leases, respectively.