ASC 842, or Accounting Standards Codification Topic 842, is a financial accounting standard established by the Financial Accounting Standards Board (FASB) to regulate lease accounting. Effective for public companies starting in 2019 and for private companies in 2020, ASC 842 fundamentally changes how leases are recorded on balance sheets.
Under ASC 842, lessees are required to recognize most leases as assets and liabilities. This means that both the right to use the leased asset and the corresponding lease obligations must be recorded, thereby providing a clearer picture of a company’s financial obligations. Leases are categorized as either operating or finance leases, which affects how expenses are recorded over the lease term.
The relevance of ASC 842 in finance and payment fields lies in its impact on financial reporting and performance metrics. By bringing leases onto the balance sheet, companies have greater transparency and comparability in financial statements. This aids investors, regulators, and stakeholders in assessing the financial health and leverage of a business more accurately.
