ASC 842 leases explained

ASC 842 brought hundreds of billions of dollars of operating lease obligations onto US balance sheets, yet kept much of the income statement looking as it did under ASC 840. This ASC 842 summary explains what lessees recognize, how operating and finance leases differ, and where ASC 842 differs from IFRS 16.

By Muhammad Bilal, Chartered Accountant. Reviewed by Awais Jameel, Chartered Accountant. Checked against official sources on . 3 minute read.

Short answer

ASC 842 is the US GAAP lease accounting standard. It requires lessees to recognize a right-of-use asset and a lease liability for almost every lease longer than 12 months, but keeps two types: finance leases, with interest and amortization recognized separately, and operating leases, with a single straight-line lease cost. It replaced ASC 840, which kept operating leases off the balance sheet, from 2019 for public companies and 2022 for private companies.

At a glance

Replaced
ASC 840
Effective
2019 public, 2022 private
Balance sheet
Right-of-use asset and lease liability
Lessee types
Operating and finance
Exemption
Short-term leases, 12 months or less
Excel
Lease calculator
ASC 842 leases explainedReplaced: ASC 840; Effective: 2019 public, 2022 private; Balance sheet: Right-of-use asset and lease liability; Lessee types: Operating and finance; Exemption: Short-term leases, 12 months or less; Excel: Lease calculator.KEY FACTS AT A GLANCEASC 842 leases explainedReplacedASC 840Effective2019 public, 2022 privateBalance sheetRight-of-use asset andlease liabilityLessee typesOperating and financeExemptionShort-term leases, 12months or lessExcelLease calculatorChecked against official sourcesTax BakersASC 842 leases explainedReplaced: ASC 840; Effective: 2019 public, 2022 private; Balance sheet: Right-of-use asset and lease liability; Lessee types: Operating and finance; Exemption: Short-term leases, 12 months or less; Excel: Lease calculator.KEY FACTS AT A GLANCEASC 842 leases explainedReplacedASC 840Effective2019 public, 2022 privateBalance sheetRight-of-use asset and lease liabilityLessee typesOperating and financeExemptionShort-term leases, 12 months or lessExcelLease calculatorChecked against official sourcesTax Bakers
Key facts at a glance, as set out in this guide.

ASC 842 summary: what do lessees recognize?

At commencement, a lessee recognizes a lease liability for the present value of the lease payments not yet paid and a right-of-use asset for the same amount, adjusted for prepaid rent, initial direct costs and lease incentives. This applies to operating and finance leases alike. The only recognition exemption is an optional one for short-term leases of 12 months or less with no purchase option the lessee is reasonably certain to exercise.

Operating lease vs finance lease: what is the difference?

Same lease under ASC 842: finance vs operatingSame lease under ASC 842: finance vs operating108,237100,000Year 1104,319100,000Year 2100,206100,000Year 395,887100,000Year 491,351100,000Year 5Finance lease amortizationFinance lease interestOperating lease cost
A five-year lease of $100,000 a year at 5%. Total expense is $500,000 either way; only the pattern differs.
Finance leaseOperating lease
Balance sheetRight-of-use asset and lease liabilityRight-of-use asset and lease liability
Income statementInterest expense plus amortization, front-loadedOne straight-line lease cost
Year 1 expense in this example$108,237$100,000
Cash flow statementPrincipal in financing; interest in operatingAll payments in operating
Formerly calledCapital leaseOperating lease

The example is a five-year lease at $100,000 a year, discounted at 5%: both types start with a lease liability of $432,948. See operating vs finance lease classification.

What changed from ASC 840?

Under ASC 842, a contract contains a lease if it conveys the right to control the use of an identified asset for a period in exchange for consideration, a test that moved some service contracts into scope and others out. Under ASC 840, operating leases were disclosed but not recognized, and capital leases were recognized much like finance leases today. ASC 842 put operating leases on the balance sheet, renamed capital leases as finance leases, updated the definition of a lease and its classification criteria, and expanded disclosures. Lessor accounting changed much less.

How does ASC 842 differ from IFRS 16?

AreaASC 842IFRS 16
Lessee modelsTwo: operating and financeOne: all leases like finance leases
Low-value exemptionNoneYes, optional
Discount rate for private companiesMay elect a risk-free rateIncremental borrowing rate
Sale and leaseback gainRecognized in full if a saleOnly the part relating to rights transferred

See IFRS 16 explained.

What are the main ASC 842 practical expedients?

  • Short-term leases: leases of 12 months or less, with no purchase option the lessee is reasonably certain to exercise, can be kept off the balance sheet, by class of asset.
  • Combining components: a lessee can account for lease and nonlease components, such as maintenance, as a single lease component, by class of asset.
  • Discount rate: private companies can elect a risk-free rate; see ASC 842 discount rates.
  • Transition reliefs: on adoption, companies could carry forward their previous lease identification and classification, among other reliefs.

What do lessees disclose?

Lease cost broken down into finance lease interest and amortization, operating lease cost, short-term and variable lease cost; cash paid for leases; right-of-use assets obtained in exchange for new lease liabilities; the weighted-average remaining lease term and discount rate, for operating and finance leases separately; and a maturity analysis of lease liabilities, reconciled to the balance sheet.

Is the operating lease liability debt?

Under ASC 842 operating lease liabilities are not presented as debt in the same way as borrowings, and many loan covenants written before ASC 842 exclude them. Finance lease liabilities are generally treated as debt. Check how each covenant defines debt and EBITDA.

Can you see both types side by side?

Yes. The Lease calculator (Excel) builds the finance lease schedule and, on its ASC 842 operating sheet, the straight-line cost and right-of-use asset amortization, with year 1 journal entries. See also ASC 842 journal entries with examples.

Need help applying the standards?

Our Chartered Accountants help finance teams and students apply US GAAP and IFRS to real transactions.

Book a call Chat on WhatsApp

Questions people ask

What is ASC 842?

The US GAAP lease accounting standard, which requires lessees to recognize a right-of-use asset and lease liability for almost all leases.

What is the difference between an operating lease and a finance lease under ASC 842?

Both are on the balance sheet. A finance lease shows interest and amortization, front-loaded; an operating lease shows one straight-line lease cost.

When did ASC 842 become effective?

For public companies, fiscal years beginning after December 15, 2018; for private companies, fiscal years beginning after December 15, 2021.

What replaced capital leases?

Finance leases. ASC 842 renamed capital leases as finance leases.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. FASB Accounting Standards Codification: Topic 842, Leases
  2. Financial Accounting Standards Board: Leases
  3. IFRS Foundation: Jurisdiction profile, United States

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

ASC 842Operating vs finance leases for lesseesASC 842ASC 842 lessee journal entries with examplesIFRS 16IFRS 16 leases explained

More in ASC 842

TopicAll 5 guides in ASC 842

This guide is general information. It is not tax or legal advice for your situation.