Accounting
Restaurant Lease Accounting Under ASC 842 (For Small Businesses)
How the ASC 842 lease accounting standard changes the balance sheet for restaurants, offices, equipment, and retail leases. What owners need to do, and what to expect from lenders after adoption.
1 / 5
What Changed and Why It Matters
- Before ASC 842, most operating leases (restaurant space, retail storefronts, office suites, and equipment) lived only in the footnotes. The balance sheet did not show the future obligation.
- ASC 842 puts almost every lease longer than 12 months onto the balance sheet as a right-of-use (ROU) asset and a matching lease liability equal to the present value of future payments.
- Private company adoption was required for fiscal years beginning after December 15, 2021. Most small businesses either adopted quietly or are still doing catch-up work.
- The change is real for lenders: the balance sheet grows meaningfully, which affects debt-to-equity ratios, working capital calculations, and covenant compliance.
Use ← → keys or swipe on mobile
Educational content, not tax, legal, or accounting advice. Confirm with a CPA before acting.
Frequently asked questions
Does ASC 842 apply to my small business?
If you issue GAAP financial statements (typically because a lender, bonding company, or investor requires them), yes. Private-company adoption was required for fiscal years beginning after December 15, 2021, and it covers essentially every lease longer than 12 months. If your books are cash- or tax-basis only and no one requires GAAP statements, the standard does not force itself on you.
What is the difference between an operating lease and a finance lease?
Both go on the balance sheet, but the P&L shape differs. Operating leases (most real estate) show one straight-line lease expense. Finance leases, typically equipment leases with a $1 buyout, a bargain purchase option, or a term covering most of the asset's life, split into interest expense plus amortization, like a financed asset purchase. Same total cost over the term, different timing.
What discount rate do I use to calculate the lease liability?
The rate implicit in the lease if you know it, which you usually will not, since landlords rarely disclose it. Most small businesses use their incremental borrowing rate: what you would pay on a secured loan of similar term. Private companies can also elect a practical expedient to use the risk-free rate instead, which is simpler but produces a larger liability.
Will ASC 842 hurt my loan covenants?
It can. The balance sheet grows by the right-of-use asset and lease liability, which moves debt-to-equity, working capital, and other covenant ratios that were written before the standard existed. Talk to your lender before adoption; most will amend covenants or add an ASC 842 exclusion when asked in advance. Discovering a technical covenant breach after the fact is a much worse conversation.
Can any leases stay off the balance sheet?
Yes, the short-term lease exemption keeps leases of 12 months or less with no purchase option off the balance sheet; they stay simple straight-line expense. Use it deliberately for month-to-month arrangements. Everything else longer than 12 months goes on, including embedded leases hiding inside service contracts, a category owners routinely miss during the lease inventory.
You might also like
Tax
S-corp vs. LLC for Small Business Owners
When the S-corp election actually saves money for an LLC owner, and when it costs more in headaches than it pays in taxes.
Tax
K-1 Income: What It Is and How to File It
If you're a partner, S-corp shareholder, or LLC member, you'll get a K-1. Here's how to read it and where each number lands on your 1040.
Tax
Multi-State Sales Tax for Remote and Online Businesses
Wayfair turned every remote-sale state into a potential tax obligation. Here's how to know where you owe, register, and stay clean.
Educational content, not tax, legal, investment, or accounting advice. See our Terms.
Want your books handled properly?
Monthly close, accrual-basis financials, and a ledger that holds up when a lender, a buyer, or an examiner asks to see it.