{"id":1945,"date":"2021-09-08T08:12:27","date_gmt":"2021-09-08T12:12:27","guid":{"rendered":"https:\/\/visuallease.com\/?p=1945"},"modified":"2022-08-04T09:09:47","modified_gmt":"2022-08-04T13:09:47","slug":"asc-842-balance-sheet-changes-a-quick-reference","status":"publish","type":"post","link":"https:\/\/visuallease.com\/asc-842-balance-sheet-changes-a-quick-reference\/","title":{"rendered":"ASC 842 Balance Sheet Changes: A Quick Reference"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_82_2 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/visuallease.com\/asc-842-balance-sheet-changes-a-quick-reference\/#WHATS_NEW_in_ASC_842_balance_sheet_changes\" >WHAT\u2019S NEW in ASC 842: balance sheet changes<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/visuallease.com\/asc-842-balance-sheet-changes-a-quick-reference\/#Most_leases_are_now_included_on_the_balance_sheet\" >Most leases are now included on the balance sheet.<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/visuallease.com\/asc-842-balance-sheet-changes-a-quick-reference\/#Leases_have_a_much_larger_impact\" >Leases have a much larger impact.<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/visuallease.com\/asc-842-balance-sheet-changes-a-quick-reference\/#Embedded_leases_must_be_reported\" >Embedded leases must be reported.<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/visuallease.com\/asc-842-balance-sheet-changes-a-quick-reference\/#Revised_lease_type_terminology\" >Revised lease type terminology.<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/visuallease.com\/asc-842-balance-sheet-changes-a-quick-reference\/#Revised_lease_classification_test\" >Revised lease classification test.<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/visuallease.com\/asc-842-balance-sheet-changes-a-quick-reference\/#New_treatment_of_operating_leases_on_the_balance_sheet\" >New treatment of operating leases on the balance sheet.<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/visuallease.com\/asc-842-balance-sheet-changes-a-quick-reference\/#New_requirements_for_disclosure_reports\" >New requirements for disclosure reports.<\/a><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<p><span style=\"font-weight: 400;\"><img decoding=\"async\" class=\"aligncenter size-large wp-image-1946\" src=\"https:\/\/visuallease.com\/wp-content\/uploads\/2019\/09\/Balance-Sheet-Changes-1024x683.jpg\" alt=\"Balance Sheet Changes\" width=\"1024\" height=\"683\" srcset=\"https:\/\/visuallease.com\/wp-content\/uploads\/2019\/09\/Balance-Sheet-Changes-1024x683.jpg 1024w, https:\/\/visuallease.com\/wp-content\/uploads\/2019\/09\/Balance-Sheet-Changes-300x200.jpg 300w, https:\/\/visuallease.com\/wp-content\/uploads\/2019\/09\/Balance-Sheet-Changes-768x512.jpg 768w, https:\/\/visuallease.com\/wp-content\/uploads\/2019\/09\/Balance-Sheet-Changes-900x600.jpg 900w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/span><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">Are you beginning to plan for your transition to <a href=\"https:\/\/visuallease.com\/compliance\/asc-842\/\">ASC 842<\/a>? Learn about the biggest ASC 842 balance sheet changes, the important implications of the changes, and get access to a helpful resource that explains the details and the transition process.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"WHATS_NEW_in_ASC_842_balance_sheet_changes\"><\/span><span style=\"font-weight: 400;\">WHAT\u2019S NEW in ASC 842: balance sheet changes<\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Here\u2019s an overview of what has changed under the new standard, and how the ASC 842 balance sheet changes will impact your financial reporting.<\/span><\/p>\n<h3><span class=\"ez-toc-section\" id=\"Most_leases_are_now_included_on_the_balance_sheet\"><\/span><strong>Most leases are now included on the balance sheet.<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400;\">Prior to ASC 842, only<a href=\"https:\/\/visuallease.com\/capital-lease-accounting-for-asc-840-and-asc-842\/\" target=\"_blank\" rel=\"noopener\"> capital leases<\/a> (leases that are essentially purchase agreements) were recorded on the balance sheet.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Under the new standard, companies must report right-of-use (ROU) assets and liabilities for almost all leases (including operating leases), with the exception of short term leases with terms of 12 months or less. That means not only high-value real estate leases, but also leases for IT and office equipment, vehicles, construction equipment, and other leased assets.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">This is the biggest change in ASC 842, and it\u2019s why the transition will be a major project for most companies. You will need to find, extract, and centralize all your lease data so you can add assets and liabilities to the balance sheet.<\/span><\/p>\n<h3><span class=\"ez-toc-section\" id=\"Leases_have_a_much_larger_impact\"><\/span><strong>Leases have a much larger impact.<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400;\">For any firm with more than a few leases, the total of all leases that must be reported under ASC 842 represents a significant value that was not previously visible on your balance sheet. When you add that value to your total assets and liabilities, the overall picture will look very different than it did in the past.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">That\u2019s one reason it\u2019s important to start your transition well in advance. Your financial leadership will want to understand the impact the ASC 842 balance sheet changes have on your company\u2019s financial statements and make decisions accordingly.<\/span><\/p>\n<h3><span class=\"ez-toc-section\" id=\"Embedded_leases_must_be_reported\"><\/span><strong>Embedded leases must be reported.<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400;\">To complicate things further, it\u2019s not only property and equipment lease contracts that you\u2019ll need to include on the balance sheet. You will also need to report on <a href=\"https:\/\/visuallease.com\/embedded-leases-accounting-do-your-contracts-contain-leases\/\">embedded leases<\/a>, which are components within contracts that entail the use of a particular asset, where the user has control over that asset.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">A lease may exist within a contract even though the contract may not contain the word &#8220;lease.&#8221;<\/span><\/p>\n<p><span style=\"font-weight: 400;\">For example, many service contracts include assets that are supplied by the vendor as part of the service.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Examining your contracts and identifying embedded leases can be a complex and time consuming task, so this new requirement is another good reason to get started on your transition sooner rather than later.<\/span><\/p>\n<h3><span class=\"ez-toc-section\" id=\"Revised_lease_type_terminology\"><\/span><strong>Revised lease type terminology.<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400;\">FASB has adjusted the terminology for leases that represent a purchase agreement, formerly known as capital leases. In the ASC 842 standard, these leases are now called <\/span><b>finance leases<\/b><span style=\"font-weight: 400;\">. The treatment of finance leases under 842 is essentially the same as treatment for capital leases under the previous standard.<\/span><\/p>\n<h3><span class=\"ez-toc-section\" id=\"Revised_lease_classification_test\"><\/span><strong>Revised lease classification test.<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400;\">A fifth lease classification question has been added in ASC 842, as part of the test to determine whether a lease is a finance lease or an operating lease:<\/span><\/p>\n<p><b>Alternative use test:<\/b> <i><span style=\"font-weight: 400;\">Is the asset so specialized that it is only useful to the lessee?<\/span><\/i><span style=\"font-weight: 400;\">\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">This new test question means that after the asset is returned to the lessor, will it have no value to anyone else without a major overhaul by the lessor?\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">As in the previous standard, if you answer YES to one or more of the lease classification questions, the lease must be classified as a finance lease.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">In addition, the \u201cbright lines\u201d for lease classification tests have been removed in ASC 842. Previously, a \u201cmajor part\u201d of economic life was defined as 75%, and \u201csubstantially all\u201d of the fair market value was defined as 90%. In ASC 842, these percentages are now considered guidelines under the new standard and you can elect what percentage you choose to use.<\/span><\/p>\n<h3><span class=\"ez-toc-section\" id=\"New_treatment_of_operating_leases_on_the_balance_sheet\"><\/span><strong>New treatment of operating leases on the balance sheet.<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400;\">In the past, operating leases were unrecorded liabilities, with the balance sheet only including prepaid or deferred rent. Adding operating leases is the biggest of the ASC 842 balance sheet changes.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Under the new FASB standard, operating leases are capitalized on the balance sheet in a similar way we previously would record capital leases under ASC 840: <\/span><span style=\"font-weight: 400;\">by recording an asset and a liability<\/span><span style=\"font-weight: 400;\">. Liability is accounted for using an amortized cost basis. Amortization of the ROU asset is calculated as the difference between straight line rent and interest expense for the period.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">These two expenses added together give you the total lease expense to book on your P&amp;L.<\/span><\/p>\n<h3><span class=\"ez-toc-section\" id=\"New_requirements_for_disclosure_reports\"><\/span><strong>New requirements for disclosure reports.<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400;\">Under ASC 842, disclosure reports must include more qualitative and quantitative details, including:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">weighted average discount rate<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">weighted average remaining lease term<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">cash paid for amounts included in lease liabilities<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">a more descriptive maturity analysis (which must be tied back to the balance sheet)<\/span><\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<p><script src=\"chrome-extension:\/\/fbnkflkahhlmhdgkddaafgnnokifobik\/assets\/pageScripts.js\"><\/script><\/p>\n<p><script src=\"chrome-extension:\/\/fbnkflkahhlmhdgkddaafgnnokifobik\/assets\/pageScripts.js\"><\/script><\/p>\n<p><script src=\"chrome-extension:\/\/fbnkflkahhlmhdgkddaafgnnokifobik\/assets\/pageScripts.js\"><\/script><\/p>\n<p><script src=\"chrome-extension:\/\/fbnkflkahhlmhdgkddaafgnnokifobik\/assets\/pageScripts.js\"><\/script><\/p>\n","protected":false},"excerpt":{"rendered":"<p>&nbsp; Are you beginning to plan for your transition to ASC 842? Learn about the biggest ASC 842 balance sheet changes, the important implications of the changes, and get access&#8230;<\/p>\n","protected":false},"author":3,"featured_media":1946,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"content-type":"","footnotes":"","_links_to":"","_links_to_target":""},"categories":[170],"tags":[185],"company_size":[],"company_portfolio_size":[],"company_industry":[],"case_study_topic":[],"class_list":["post-1945","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-lease-accounting","tag-asc-842"],"acf":[],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/visuallease.com\/wp-json\/wp\/v2\/posts\/1945","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/visuallease.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/visuallease.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/visuallease.com\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/visuallease.com\/wp-json\/wp\/v2\/comments?post=1945"}],"version-history":[{"count":0,"href":"https:\/\/visuallease.com\/wp-json\/wp\/v2\/posts\/1945\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/visuallease.com\/wp-json\/wp\/v2\/media\/1946"}],"wp:attachment":[{"href":"https:\/\/visuallease.com\/wp-json\/wp\/v2\/media?parent=1945"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/visuallease.com\/wp-json\/wp\/v2\/categories?post=1945"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/visuallease.com\/wp-json\/wp\/v2\/tags?post=1945"},{"taxonomy":"company_size","embeddable":true,"href":"https:\/\/visuallease.com\/wp-json\/wp\/v2\/company_size?post=1945"},{"taxonomy":"company_portfolio_size","embeddable":true,"href":"https:\/\/visuallease.com\/wp-json\/wp\/v2\/company_portfolio_size?post=1945"},{"taxonomy":"company_industry","embeddable":true,"href":"https:\/\/visuallease.com\/wp-json\/wp\/v2\/company_industry?post=1945"},{"taxonomy":"case_study_topic","embeddable":true,"href":"https:\/\/visuallease.com\/wp-json\/wp\/v2\/case_study_topic?post=1945"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}