Accounting
ASC 842 (Lease Accounting)
The accounting standard requiring most operating leases to appear on the balance sheet as a right-of-use asset and lease liability.
Before ASC 842, operating leases (office space, equipment) lived in the footnotes; businesses signed multi-year commitments that never appeared on the balance sheet. ASC 842 forces them on, materially changing the balance sheet of any business with long leases.
Two lease types remain: finance leases (similar to ownership, depreciation + interest) and operating leases (single straight-line expense, but with a right-of-use asset and liability on the balance sheet).
Short-term leases (12 months or less) are exempt. For private companies, lender covenants and ratio calculations often need restating after adoption.
Common pitfalls
- Forgetting embedded leases inside service contracts (e.g., dedicated server hosting, equipment-as-a-service)
- Misclassifying related-party leases; these get extra scrutiny from auditors and the IRS
- Not updating loan covenants to reflect the new balance sheet shape after adoption
Related service
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