ASC 842, or the Accounting Standards Codification 842, is a new financial reporting standard issued by the Financial Accounting Standards Board (FASB) that aims to improve transparency and comparability in reporting lease assets and liabilities. This standard replaces the previous standard, ASC 840, and requires all entities to recognize lease assets and liabilities on their balance sheet. But what exactly are the assets that are covered under ASC 842? Let us take a closer look.
1. Operating Leases
ASC 842 covers both operating and finance leases. Operating leases are leases where the lessee does not control the underlying asset and does not transfer ownership of the asset to the lessee at the end of the lease term. These leases are recorded as rent expense under the previous standard, ASC 840. However, under ASC 842, operating leases are now recognized as lease liabilities and corresponding right-of-use (ROU) assets on the balance sheet.
2. Finance Leases
Finance leases, on the other hand, are leases where the lessee has control over the underlying asset and is considered the owner of the asset for accounting purposes. Under ASC 840, finance leases were recognized as assets and liabilities on the balance sheet. ASC 842 maintains this treatment, but with some changes in the recognition and measurement of these assets and liabilities.
3. Tangible Assets
ASC 842 covers all tangible assets that are leased, such as buildings, land, vehicles, and equipment. These assets must be identified and evaluated to determine if they meet the criteria for a lease under the new standard. If they do, they will be recognized as ROU assets on the balance sheet.
4. Intangible Assets
Intangible assets, such as patents, copyrights, and trademarks, can also be leased under ASC 842. These assets must be identified and evaluated to determine if they meet the definition of a lease. If they do, they will also be recognized as ROU assets on the balance sheet.
5. Identifiable Assets
ASC 842 requires entities to recognize lease liabilities and ROU assets for all leases with a term of more than 12 months. This includes both identifiable and non-identifiable assets. Identifiable assets are those that are specifically identified in the lease agreement, such as a specific piece of equipment or a specific building. Non-identifiable assets, on the other hand, are those that are not specifically identified in the lease agreement but are part of the leased asset, such as common areas in a building.
6. Embedded Leases
ASC 842 also covers embedded leases, which are leases that are embedded within a larger contract or agreement. Under ASC 840, these leases were not recognized separately and were treated as part of the overall contract. However, under ASC 842, entities must identify and separate embedded leases and recognize them as lease liabilities and ROU assets.
In conclusion, ASC 842 covers a wide range of assets, including both tangible and intangible assets, operating and finance leases, and identifiable and non-identifiable assets. This new standard aims to provide a more accurate representation of a company’s financial position by requiring them to recognize lease assets and liabilities on their balance sheet. Entities must carefully evaluate all their lease agreements to determine which assets are covered under ASC 842 and ensure compliance with the new standard.