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What does ASC 842 do? The new ASC 842 standard for lease accounting requires all leases longer than 12 months to be recorded as assets and liabilities on balance sheets. The Financial Accounting Standards Board, or FASB, created this new standard to foster more transparency between investors and companies. ASC 842 replaces the previous lease accounting standard, ASC 840, under which certain leases could be classified as “operating leases” and written off as operational expenses. As a result, they were excluded from calculations such as return on assets, and these exclusions could give an investor a false depiction of a company’s performance. With ASC 842, all organizations following generally accepted accounting principles, or GAAP, are required to categorize all leases as both liabilities and right-of-use assets.

The Financial Accounting Standards Board changed the lease accounting game forever when they declared the ASC 842 new lease accounting standard. ASC 842, which replaces the previous GAAP standard ASC 840, changes the way leases are classified, which therefore affects how lease accounting is executed. Before the alteration, leases were either capital or operating leases; with the new standard, capital leases are now called finance leases. However, the accounting calculations for them have remained the same. Operating leases, in contrast, are still the same by name but are calculated in a different way. But that’s only the beginning. Let’s start with some basic definitions and then jump into the nitty gritty, answering questions like “what qualifies as a finance lease?” and “do operating leases go on the balance sheet?”.