ASC 842: Leases

For many years, economically similar financing arrangements could produce dramatically different balance sheets simply because one company purchased an asset while another leased it. Companies often controlled buildings, equipment, and other long lived assets for years while reporting little or none of the related obligations on the balance sheet.

ASC 842 has been designed to better align financial reporting with economic reality. In most cases, if a company controls the use of an asset over a period of time in exchange for future payments, that right and the related obligation belong on the balance sheet. The standard is intended to improve transparency without eliminating the meaningful distinction between different types of leases.

Applying that principle requires judgment. Determining whether a contract actually contains a lease, identifying the period over which control exists, estimating future obligations, and distinguishing leases from service arrangements often requires significant analysis, even though the underlying objective remains the same.

At this point, you understand the economic substance that ASC 842 is trying to capture. Everything that follows is simply the framework used to apply that principle in practice.