In the world of accounting, compliance rules can feel like an endless stream of new acronyms and adjustments. But some changes, like ASC 842 leases, are too important to put off. This standard, issued by the Financial Accounting Standards Board (FASB), changes how companies record leases on their balance sheets—and it affects businesses of all sizes. Whether you run a small firm with a few office rentals or a large corporation with multiple property and equipment leases, understanding ASC 842 is essential for transparency, compliance, and smart decision-making.
What Is ASC 842 and Why It Matters
Before ASC 842, many leases could be classified as “operating leases” and kept off the balance sheet. That meant businesses could have significant financial obligations that didn’t appear in their reported liabilities, potentially skewing the picture of their financial health. ASC 842 changed that. Now, most leases longer than 12 months must be recognized as both a right-of-use asset and a corresponding lease liability. This makes a company’s financial commitments much clearer to investors, lenders, and regulators.
The Business Impacts of ASC 842
Understanding and implementing ASC 842 isn’t just about ticking a compliance box—it can influence broader business strategy. Bringing leases onto the balance sheet affects debt ratios, which in turn can impact borrowing power and investment decisions. It also forces businesses to re-examine lease terms, negotiate better deals, and consider whether leasing or buying is the smarter choice.
Practical Steps for Compliance
If your business hasn’t fully transitioned to ASC 842 yet, the process can seem overwhelming. Breaking it down into manageable steps can help:
- Identify all leases across departments (including embedded leases in service contracts).
- Classify leases based on term length and conditions to determine which ones fall under ASC 842.
- Gather data such as payment schedules, renewal options, and asset details.
- Update accounting systems to handle the new reporting requirements.
- Train your finance team so they understand the nuances of the standard.
Why Timely Compliance Pays Off
Procrastinating on ASC 842 adoption can create unnecessary stress—and potential penalties. The sooner businesses align with the standard, the better they can:
- Maintain credibility with stakeholders
- Avoid rushed, error-prone reporting
- Gain a more accurate picture of long-term financial obligations
Challenges Businesses Face
For many companies, the biggest challenge with ASC 842 is gathering accurate lease data. In large organizations, lease agreements might be scattered across different departments, stored in outdated formats, or embedded in contracts not labeled as leases. Without a centralized system, it’s easy to miss key details. This is why many businesses invest in lease management software to streamline the process.
The Bigger Picture
According to Deloitte, 63% of public companies reported that complying with ASC 842 required significantly more time and effort than they originally anticipated. This is a clear sign that businesses shouldn’t underestimate the scope of the transition. For those willing to adapt early, though, ASC 842 can be more than a compliance hurdle—it can become a tool for better financial insight and operational efficiency.
By truly understanding ASC 842, businesses can move beyond simply meeting the standard and use it to strengthen strategic planning, improve transparency, and make smarter long-term decisions.