FAR, Financial Accounting and Reporting
Sources for Leases
Last reviewed
The standards and authorities behind PocketCPA's FAR lessons on Leases. The topic rests on ASC 842.
About this topic
A lease is a deal to use somebody else's asset for a time and to pay for the privilege. The accounting carries real weight, because leasing is how many companies finance property and equipment without borrowing outright.
ASC 842 replaced ASC 840 and made one sweeping change. A lessee now records almost every lease on its balance sheet, as a right-of-use (ROU) asset and a lease liability. The old world, in which operating leases lived only in the footnotes, is gone.
Key points
- A lease exists when a contract conveys the right to control the use of identified property, plant, or equipment for a period of time.
- Lessees recognize a right-of-use asset and a lease liability for virtually all leases; the short-term exemption applies to leases of 12 months or less.
- A finance lease transfers substantially all risks and rewards (any of the five classification tests); an operating lease does not.
- The discount rate is the rate implicit in the lease if determinable; otherwise the lessee uses its incremental borrowing rate.
What the lessons cover
- Identifying a lease: the control test (ASC 842-10-15-3)
- Separating lease and nonlease components (ASC 842-10-15-28)
- Determining the lease term (ASC 842-10-30-1)
- Lessee classification: finance versus operating (ASC 842-10-25-2)
- Lessee initial measurement (ASC 842-20-30)
- Guarantees, purchase options and penalties in the liability (ASC 842-10-30-5)
- Subsequent measurement and the expense pattern (ASC 842-20-25 and 35)
- Lease modifications and terminations (ASC 842-10-25-8)
- Lessor accounting (ASC 842-30)
- Sales-type leases with a residual value, and collectibility (ASC 842-30-30-1)
- Short-term lease exemption (ASC 842-20-25-2)
- Subleases (ASC 842-20-35-14)
- Sale and leaseback transactions (ASC 842-40)
- Presentation and disclosure (ASC 842-20-45 and 50)
Authoritative references
Where these requirements sit in the literature.
- ASC 842-20-25-1 is the lessee recognition requirement.
- What is recognized. At the commencement date a lessee recognizes a right-of-use asset and a lease liability, for every lease other than one it elects to treat as short-term.
- In entry form that paragraph is a single line, and it is the same line for a finance lease and an operating lease. Using the delivery truck from the identification lesson, it is Dr Right-of-Use Asset 101,096.73 and Cr Lease Liability 101,096.73.
- Measurement of those two amounts follows in ASC 842-20-30.
- ASC 842-30-40-2, 45-1 through 45-7, and 50-10 through 50-13 carry the lessor side: early termination of a sales-type or direct financing lease, presentation (the net investment separate from other assets, commencement profit by business model, every receipt in operating activities), and the two separate maturity analyses.
How PocketCPA uses these sources
Every lesson is written in original words and cites the paragraph each rule comes from. No standard's text is reproduced. How lessons and questions are written and checked is set out in our methodology.