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In early 2016, the FASB released ASC 842, Leases, to promote greater transparency for financial statement stakeholders. The new standard requires the majority of a company’s leases to be recorded on the balance sheet.

Effective Date

For private companies, Topic 842 was originally set to be effective for reporting periods beginning subsequent to December 15, 2019. In October of 2019, the FASB delayed the effective date for private companies to provide extra time and to allow for effective and efficient implementation of the standard. A second delay for private companies was issued in June of 2020 to provide private companies with accounting relief during the COVID-19 pandemic.

ASC 842 is now effective for private companies and nonprofit organizations with annual reporting periods beginning after December 15, 2021.

Lessee Accounting

The new lease accounting standard uses two models when accounting for leases: a financing lease or an operating lease. A financing lease is a new term and replaces the term capital lease used in current lease accounting (ASC 840).

Under the new standard (ASC 842), the most significant change for mortgage companies is the requirement to recognize an asset and liability on the balance sheet for all operating leases. The lease liability is measured as the present value of lease payments and the lease asset is equal to the lease liability adjusted for certain items like prepaid rent and lease incentives. The asset is known as the right of use asset and represents a company’s right to use the underlying asset. The liability represents a company’s financial obligation over the lease term. Companies need to assess the likeliness of any possible renewals when measuring the asset and liability and include any renewals that are reasonably certain in the calculation.

ASC 842 applies to all leases with one exception: for leases less than 12 months in length, a company can elect not to recognize the lease asset and liability and recognize it as lease expense over the term of the lease (similar to current treatment under ASC 840).

Capital leases will be accounted for essentially the same as they are under ASC 840 but will now be referred to as a finance lease on a company’s balance sheet.

You can find the full standard here: