ASC 842: How will it impact GAAP financial statements?

December 13, 2021

ASC 842: How will it impact GAAP financial statements?

With the implementation of the new lease accounting standard (ASC 842) effective for private organizations in 2022, many companies who issue GAAP financial statements may be wondering what effect the standard will have on those statements.

One of the biggest changes with the new standard is the creation of right of use (ROU) assets and related liabilities for both finance (formally known as capital leases) and operating leases. Part of the intent of the standard was to shed more light on “off-balance sheet” financing - which is why operating leases will be reported on balance sheets going forward in the form of those ROU assets and liabilities.

For the balance sheet, companies with both finance and operating leases will have at a minimum six accounts reflecting those leases. The right of use assets and lease liabilities must be presented by lease classification: finance and operating. There will be a Finance Lease – ROU asset, Operating Lease – ROU asset and then their corresponding liabilities of which there needs to be both current and noncurrent portions. With the movement of operating leases to the balance sheet and the subsequent increase in liabilities, this may have an adverse effect on debt covenants depending on how they are calculated. Companies should consult with their lenders to see what the effect could be.

The changes to the presentation of the income statement are not as robust as the changes to the balance sheet. For finance leases, the presentation remains the same with amortization of the ROU asset included in operating expenses and the interest portion of payments made included in nonoperating expenses. Operating leases will be included in a single lease expense included with operating expenses. There is generally no impact on the income statement related to the standard as the expense per lease should remain the same.

The statement of cash flows presents the cash portion of the finance lease payment that is attributable to the principal portion of the lease liability as an outflow from financing activities. Any other lease related cash payments are included in the cash outflows from operating activities. In the year of implementation, the amount that is recorded as a ROU asset and related liability will be included as a supplemental noncash disclosure at the bottom of the statement of cash flows.

One of the biggest areas of impact on the financial statements from ASC 842 will be the disclosures required. Financial statement issuers will need to disclose information regarding the nature of the lease (description, terms, information regarding termination clauses, covenants, variable payments, etc.). Information related to leases that have not yet commenced but that have significant rights and obligations for the lessees will also have to be disclosed. Additional disclosures related to the issuer’s lease portfolio include information related to accounting policy elections regarding short term leases, any significant judgements or assumptions made in the entity’s accounting for leases as well as information pertaining to any sale-leaseback transactions. The standard also has a provision indicating that issuers will need to calculate the weighted average of the remaining lease term and the weighted average discount rate for both types of leases, and provide this information in the notes to the financial statements. In addition, the guidance will require the lessee to provide a maturity analysis on both its finance and operating leases separately.

The new standard will require companies to become intimately familiar with their lease portfolios to provide the necessary information needed to comply with the standard. Herbein & Company has partnered with LeaseCrunch to make the implementation and documentation easier for our clients. For more information, reach out to

To learn more about our lease accounting services, click here.

Article prepared by Ashley Blessing.

New call-to-action