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Lessee accounting under ASC 842 This applies to all leased asset categories covered under the standard, including leases of equipment and real estate.

The primary impact of ASC 842 and IFRS 16 is that they require nearly all leases to be reported on the lessees' balance sheets as assets and liabilities.

This means companies must report ROU assets and lease liabilities for operating leases as well as for finance (capital) leases under ASC 842. So now IT and office equipment, vehicles, construction equipment, and other leased assets must appear on the balance sheet along with real estate leases.

The lessor reports the lease as a leased asset on the balance sheet and individual lease payments as income on the income and cash flow statements. The lessee reports the lease as both an asset and a liability on the balance sheet due to their stake as a potential owner of the asset and their required payment.

Under the new lease accounting standards, lessees are required to calculate the present value of any future lease payments to determine the obligations to be recorded on the balance sheet for both operating and finance leases.

Under ASC 842, both the lessor and lessee are required to separately account for the land component unless this would have an insignificant effect on the entity's accounting practice. The lessee would record a right-of-use asset and a lease liability in the balance sheet.

INTRODUCTION TO ASC 842 The new lease standard now requires lessees to classify all leases either as a finance lease or an operating lease, and all lessors to classify leases either as a sales-type, direct financing, or operating lease.

Under ASC 842, the impact on a lessee's income statement generally will be minimal. The way a lessee accounts for rent expense under the new standard is generally the same as before ? straight-line over the term of the lease. Therefore, a lessee's income statement is not likely to see any significant impacts.

For entities that have adopted Topic 842 as of November 11, 2021, the amendments in this Update are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Earlier application is permitted.

What is ASC 842 Summary? The ASC 842 standard for lease accounting requires all leases longer than 12 months to be recorded as assets and liabilities on balance sheets. The Financial Accounting Standards Board, or FASB, created this new standard to foster more transparency between investors and companies.