Lease accounting has undergone a major transformation under ASC 842, creating new challenges—and new opportunities—for finance teams. The standard requires organizations to bring nearly all leases onto the balance sheet, making proper classification, calculation, and documentation more important than ever.
This guide breaks down the fundamentals of ASC 842 lease accounting, explores why automation has become essential, and provides a roadmap for implementing technology that simplifies compliance, strengthens controls, and improves financial accuracy.
Understanding ASC 842 Lease Accounting
What is ASC 842 and why it matters
ASC 842 is the lease accounting standard issued by the Financial Accounting Standards Board (FASB). Its primary purpose is to improve transparency by requiring companies to recognize right-of-use (ROU) assets and lease liabilities for most leasing arrangements.
This standard matters because it:
- Ensures greater comparability across organizations
- Eliminates off-balance-sheet financing loopholes
- Provides more accurate representations of a company’s obligations
- Impacts financial ratios, disclosures, and debt covenant calculations
In short, ASC 842 raises the bar for organizations to maintain high-quality lease data and consistent accounting practices.
Lease definition and classification
Under ASC 842, a lease is defined as a contract—or part of a contract—that conveys the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. A contract contains a lease if:
- There is an identified asset (explicitly or implicitly specified)
- The customer has the right to obtain substantially all economic benefits from the asset
- The customer has the right to direct the use of the asset throughout the lease term
Once a lease is identified, lessees must classify it as either a finance lease or an operating lease. A lease is classified as a finance lease if it meets any one of these criteria:
- Ownership transfers to the lessee by the end of the lease term
- The lessee has a purchase option that is reasonably certain to be exercised
- The lease term covers the major part of the asset’s remaining economic life
- The present value of lease payments equals or exceeds substantially all of the asset’s fair value
- The asset is specialized with no alternative use to the lessor
If none of these criteria are met, the lease is classified as an operating lease. Classification matters because finance leases result in front-loaded expense recognition, while operating leases produce straight-line expense over the lease term.
Key differences between ASC 842 and ASC 840
ASC 842 replaces the old GAAP lease accounting standard, ASC 840. The primary difference is balance-sheet recognition. Notably:
- Operating leases now appear on the balance sheet as ROU assets and corresponding liabilities.
- New definitions and criteria for lease classification and embedded leases.
- Enhanced disclosure requirements around maturity, variable payments, discount rates, and assumptions.
- Updated guidance for sale-leaseback arrangements and related-party transactions.
Organizations reporting under IFRS should note that IFRS 16 takes a similar approach to ASC 842, requiring balance-sheet recognition of most leases. However, IFRS 16 uses a single lessee classification model (all leases treated similarly to finance leases), while ASC 842 retains the dual classification model. Lessor accounting also differs, with IFRS 16 more closely aligned with prior standards.
These changes increase the level of scrutiny applied to lease portfolios and complicate manual management approaches.
Effective dates and transition guidance
ASC 842 became effective for public companies for fiscal years beginning after December 15, 2018. For private companies and private not-for-profits, the standard became effective for fiscal years beginning after December 15, 2021.
Organizations had two transition options:
- Modified retrospective approach with application at the beginning of the earliest comparative period presented
- Modified retrospective approach with application at the adoption date (with no restatement of comparative periods)
Practical expedients were available to ease the transition burden, including the option to not reassess whether existing contracts contain leases, lease classification, or initial direct costs. Organizations that have already adopted ASC 842 must still ensure ongoing compliance as portfolios evolve and new guidance is issued.
Common challenges companies face with lease accounting
Many organizations struggle with:
- Siloed or incomplete lease data spread across departments
- Manual spreadsheets that introduce errors and inconsistencies
- Difficulty identifying embedded leases in service agreements
- Complex calculations for ROU assets, lease liabilities, and modifications
- Keeping up with remeasurements triggered by changes in terms, rates, or usage
These challenges are magnified for organizations with large lease portfolios or diverse asset types such as real estate, vehicles, equipment, fleets, and technology.
Lessee accounting under ASC 842
Measurement and recognition of lease assets and liabilities
At lease commencement, lessees must recognize both a right-of-use (ROU) asset and a lease liability on the balance sheet. The initial measurement includes:
- Lease liability: The present value of lease payments not yet paid, discounted using the rate implicit in the lease (if determinable) or the lessee’s incremental borrowing rate
- ROU asset: The initial lease liability amount, plus any lease payments made before commencement, plus initial direct costs, minus any lease incentives received
Subsequent measurement differs by lease classification:
- Finance leases: The lease liability is increased by interest expense and reduced by lease payments. The ROU asset is amortized separately, typically on a straight-line basis.
- Operating leases: A single lease cost is recognized on a straight-line basis over the lease term. The lease liability is increased by interest and reduced by payments, while the ROU asset is adjusted to maintain straight-line expense.
Lease modifications, remeasurements, and impairment assessments add further complexity and require ongoing attention throughout the lease term.
Lessor accounting under ASC 842
Lessor accounting under ASC 842 largely carries forward the principles from ASC 840, but with updated classification criteria and enhanced disclosure requirements. Lessors classify leases into three categories:
- Sales-type lease: The lessor derecognizes the underlying asset, recognizes a net investment in the lease, and records any selling profit or loss at commencement. This classification applies when any of the finance lease criteria are met from the lessee’s perspective.
- Direct financing lease: Similar to a sales-type lease, but any selling profit is deferred and recognized over the lease term. This applies when finance lease criteria are met, the lessor is not a manufacturer or dealer, and the present value of payments plus residual value equals substantially all of the asset’s fair value.
- Operating lease: The lessor retains the asset on its balance sheet, continues to depreciate it, and recognizes lease income on a straight-line basis over the lease term.
For organizations that operate as both lessees and lessors—such as companies that sublease real estate or equipment—automation becomes especially critical to manage the complexity of dual-sided accounting requirements.
ASC 842 disclosure requirements
ASC 842 significantly expands disclosure requirements for both lessees and lessors. These disclosures help financial statement users understand the amount, timing, and uncertainty of cash flows arising from leases.
Lessees must disclose:
- Finance lease cost (amortization and interest) and operating lease cost
- Short-term lease cost and variable lease cost
- Sublease income and net gain or loss from sale-leaseback transactions
- Maturity analysis of lease liabilities (undiscounted cash flows for years 1-5 and thereafter)
- Weighted-average remaining lease term and discount rate
- Qualitative information about variable payments, renewal/termination options, and residual value guarantees
Lessors must disclose:
- Lease income by category (sales-type, direct financing, operating)
- Components of net investment in sales-type and direct financing leases
- Maturity analysis of lease receivables
- Carrying amount of assets subject to operating leases by major class
Given the volume and complexity of required disclosures, automation is essential for generating accurate, timely, and audit-ready reports.
Sale-leaseback and special lease arrangements
ASC 842 provides specific guidance for sale-leaseback transactions and other special arrangements.
Sale-leaseback transactions
A sale-leaseback occurs when an entity sells an asset and immediately leases it back. Under ASC 842, the transaction is accounted for as a sale-leaseback only if the transfer qualifies as a sale under ASC 606. Key considerations include:
- If the transfer qualifies as a sale, the seller-lessee derecognizes the asset, recognizes the ROU asset and lease liability, and records any gain or loss (adjusted for off-market terms)
- If the transfer does not qualify as a sale (e.g., repurchase option exists), the transaction is accounted for as a financing arrangement
- The buyer-lessor accounts for the purchase and lease under applicable guidance
Leveraged leases
ASC 842 eliminates leveraged lease accounting for new leases. However, lessors may continue applying legacy leveraged lease accounting to leases that commenced before ASC 842 adoption, as long as those leases are not modified.
Related party and common control leases
Leases between related parties must be classified based on legally enforceable terms, even if those terms differ from arm’s length. For leases between entities under common control, the lessee may use the carrying amount of the leased asset (rather than fair value) to measure the ROU asset and lease liability.
The need for automation in ASC 842 compliance
Manual lease accounting processes struggle to deliver the accuracy, speed, and auditability required under ASC 842. Automating lease accounting centralizes all lease data in a single system, replaces error-prone spreadsheets with standardized calculations, and produces audit-ready journal entries and disclosures. Automation also enables leases to be automatically remeasured when defined triggers occur, giving finance teams real-time visibility into lease obligations and their financial impact—without constant manual intervention.
Beyond compliance, automation also reduces reliance on IT and empowers finance teams to manage ongoing requirements with confidence. When integrated with core systems like ERP, CRM, and revenue platforms—including those supporting ASC 606—automated lease accounting becomes part of a unified financial ecosystem, improving control, transparency, and consistency across the entire revenue and reporting lifecycle.
Learn more about RecVue’s capabilities in Revenue Recognition Software.
Core features of an ASC 842 lease accounting automation tool
For maximum efficiency, automation platforms should have several essential capabilities:
Lease data management
A centralized repository for capturing all lease contracts, terms, rates, options, and amendments—eliminating fragmented data sources.
Automated journal entries and reporting
Pre-built formulas generate accurate ROU asset and liability calculations, amortization schedules, and journal entries tied directly to the general ledger.
Integration with ERP and financial systems
Bidirectional integrations ensure consistent data across billing, AP, procurement, fixed assets, and general ledger systems.
Real-time compliance monitoring
Dashboards and alerts track renewals, terminations, modifications, and reassessments as they occur, keeping financial reporting continuously accurate.
Steps to implement ASC 842 automation
Follow these basic steps to automate your ASC 842 lease accounting:
Step 1: Assess current lease portfolio
Gather all leases across the organization. Identify:
- Total lease count
- Lease types (real estate, equipment, vehicles, IT, embedded leases)
- Data gaps
- Systems currently used (ERP, spreadsheets, contract repositories)
This assessment reveals the scope of required changes.
Step 2: Select the right software solution
Choose a platform that offers:
- Automated calculations
- End-to-end lease lifecycle management
- Strong controls and audit trails
- ERP connectivity
- Scalability for growing lease volumes
Look for solutions that support rules-based automation and continuous updates to comply with future FASB amendments.
Step 3: Clean and standardize lease data
Ensure all contract fields are:
- Complete and accurate
- Consistently formatted
- Validated against source documents
This step is critical for smooth onboarding and accurate initial measurements.
Step 4: Configure workflows and integrations
Automate workflows such as:
- Approval processes
- Renewal notifications
- Modifications and reassessments
Integrate these workflows with ERP, procurement, and contract management systems.
Step 5: Train users and test the system
Conduct user acceptance testing to validate:
- Calculation accuracy against manual benchmarks
- Proper integration data flows
- Correct journal entry generation and posting
- Disclosure report accuracy and completeness
Provide finance, accounting, and operations teams with the necessary training and documentation.
Step 6: Go live with confidence
Finalize configurations and migrate all lease data into the new platform. Ensure ongoing monitoring and review processes are in place.
Best practices for ASC 842 implementation and staying compliant
Successfully implementing ASC 842 requires more than selecting the right technology—it demands disciplined processes and ongoing governance. These best practices help organizations stay compliant, reduce risk, and maintain accuracy as lease portfolios evolve.
Continuous lease data review
Keep data accurate with ongoing monitoring of new leases, renewals, and modifications. Establish a regular cadence for reviewing lease data and assign clear ownership for data entry and validation across departments.
Regular software updates and training
Ensure your team understands new features, standards updates, and process improvements. Work with your software vendor to stay informed about updates that address new FASB guidance.
Audit preparation and documentation
Maintain audit-ready logs, documentation, and automated reports to streamline reviews and reduce risk. Use your platform’s audit trail features to log every change, approval, and journal entry.
For more insight into the benefits of automation, read: Benefits of Automating Revenue Recognition.
Measuring the ROI of lease accounting automation
Measuring the ROI of lease accounting automation starts with the time it gives back to finance teams. By eliminating manual spreadsheets, reconciliations, and recurring adjustments, automation significantly reduces the hours required to calculate and maintain lease data. This frees teams to focus on higher-value analysis rather than repetitive compliance work.
Just as importantly, automation lowers the risk of errors and costly penalties by ensuring calculations are accurate, consistent, and aligned with accounting standards. With real-time visibility into lease data, finance leaders gain stronger financial transparency—improving forecasting, budgeting, and strategic decision-making across the organization.
Conclusion
ASC 842 dramatically changes how organizations handle lease accounting—but automation makes compliance achievable, efficient, and scalable. By centralizing data, eliminating manual errors, and providing audit-ready reporting, modern automation tools empower businesses to stay compliant and confident.
Key takeaways for successful automation
- ASC 842 requires detailed balance-sheet recognition for most leases
- Manual processes introduce risk and inefficiency
- Automation centralizes data, standardizes accounting, and reduces errors
- A structured implementation process ensures long-term compliance
- Future trends point toward even greater automation, AI-driven classification, and deeper ERP integration
Future trends in lease accounting automation
The evolution of lease accounting technology continues. AI-driven lease classification is emerging as a powerful capability, using machine learning to automatically identify and categorize leases—including embedded leases hidden in service agreements. Deeper ERP integration will blur the lines between lease accounting and broader financial management, while predictive analytics will give finance teams the ability to model scenarios and proactively manage portfolio risk.
ASC 842 compliance doesn’t have to be a constant source of friction or risk. With the right automation in place, finance teams can move beyond reactive compliance to a more controlled, transparent, and scalable approach to lease accounting. By investing in automation now, organizations not only meet today’s requirements with confidence—but also build a stronger financial foundation for whatever comes next.
Learn how to reduce your compliance burden without compromising accuracy with RecVue Revenue Recognition Software.
About the Author
