Navigating ASC 842: Key Changes and Easy Hacks for US Bookkeepers

Lease accounting under US GAAP has changed in a way that affects almost every business renting office space, equipment, or other assets. The new standard, ASC 842, requires most leases to be recorded on the balance sheet as assets and liabilities. This means bookkeepers working with US clients must adjust how they handle leases to keep ledgers accurate and audit-ready. This post breaks down the key changes and offers simple hacks to make the transition smoother.

Quick 5 test for identifying Finance Lease ASC 842

What Changed with ASC 842?

Before ASC 842, many leases were treated as operating leases and stayed off the balance sheet. Companies only recorded lease payments as expenses on the income statement. This approach hid significant rental obligations from the balance sheet, making financial statements less transparent.

Now, ASC 842 requires companies to recognize a right-of-use (ROU) asset and a corresponding lease liability for most leases. This applies to office space, equipment rentals, and other leased assets. The goal is to show the economic reality of leases: they represent a right to use an asset and an obligation to make payments.

Key Points of the New Approach

• Right-of-use asset appears on the balance sheet.

• Lease liability matches the present value of future lease payments.

• Short-term leases (12 months or less) can still be treated with flexibility and kept off the balance sheet.

• Leases that feel like buying (finance leases) require different accounting than operating leases.

  
  

How to Classify Leases: The Five Tests

Classifying leases correctly is crucial. ASC 842 splits leases into two categories:

• Finance leases (similar to owning)

• Operating leases (similar to renting)

  
  

Use these five tests to decide which category fits your lease:

1. Ownership transfer at the end of the lease term?

   If yes, classify as finance.

   
   

2. Bargain purchase option available?

   If yes, classify as finance.

   
   

3. Lease term covers 75% or more of the asset’s economic life?

   If yes, classify as finance.

   
   

4. Present value of lease payments equals or exceeds 90% of the asset’s fair value?

   If yes, classify as finance.

   
   

5. Asset is so specialized that only the lessee can use it without major modifications?

   If yes, classify as finance.

   
   

If none of these apply, treat the lease as operating.

Easy Hacks for Bookkeepers

Bookkeepers can simplify ASC 842 compliance with a few practical steps:

• Gather lease contracts and identify payment schedules.

• Use free Excel tools or online calculators to find the present value (PV) of lease payments. This PV becomes the lease liability.

• Record the right-of-use asset and lease liability on the balance sheet.

• Amortize the lease liability monthly, similar to a car loan.

• For finance leases, front-load the expense (interest + amortization). For operating leases, spread the expense evenly over the lease term.

• At year-end, review leases to avoid surprises during audits.

  
  

Example

Suppose your client rents office equipment for 3 years with monthly payments of $1,000. The equipment’s fair value is $30,000. The lease term covers 80% of the equipment’s life, and there is no bargain purchase option.

• Since the lease term covers more than 75% of the asset life, this is a finance lease.

• Calculate the PV of payments (e.g., $33,000).

• Record a right-of-use asset and lease liability of $33,000.

• Amortize the liability monthly and recognize interest expense upfront.

  
  

This approach keeps your client’s books clean and audit-proof.

Why This Matters for US Clients

Many US companies have cross-border operations and complex lease portfolios. ASC 842 ensures transparency and consistency in financial reporting. Bookkeepers who understand and apply these rules help clients avoid audit issues and maintain trust with stakeholders.

By running the five tests on every lease contract and using simple PV calculators, bookkeepers can classify leases correctly and keep monthly records aligned with US GAAP.

What Surprises Bookkeepers Most?

Among the five tests, many find the specialized asset test surprising. It means that if the leased asset is unique to the lessee and cannot be easily used by others, the lease is treated as a finance lease. This can apply to custom machinery or specialized vehicles.

Which test do you find most surprising? Share your thoughts in the comments!