ASC 842 introduced the most significant change to lease accounting in decades. For many companies, the initial implementation required a massive effort across accounting, real estate, and technology teams.
Now that the transition period has passed, companies face a new challenge: maintaining compliance and building sustainable processes.
At National Lease Advisors, we work with companies that manage multi-location real estate portfolios across the country. Through ASC 842 implementations and ongoing support, we have seen firsthand where companies struggle and what successful organizations do differently.
This refresher highlights the key lessons companies have learned since ASC 842 went into effect.
1. ASC 842 Overview
ASC 842 fundamentally changed how companies report leases on their financial statements.
Under the previous standard (ASC 840), operating leases were typically disclosed in the footnotes and expensed through the income statement. The lease liability itself did not appear on the balance sheet.
ASC 842 changed that.
Companies must now recognize:
- A lease liability representing future lease payments
- A right-of-use (ROU) asset representing the right to use the leased property
Both amounts appear on the balance sheet.
Adoption Timeline
The implementation timeline differed for public and private companies:
- Public companies: Fiscal years beginning after December 15, 2018 (January 1, 2019 for calendar year companies)
- Private companies: Fiscal years beginning after December 15, 2021 (January 1, 2022 for calendar year companies)
Today, most companies have already adopted the standard. The focus has shifted from implementation to ongoing compliance and reporting.
Which Companies Must Comply?
ASC 842 applies to most organizations that issue financial statements under U.S. GAAP.
This typically includes:
- Public companies
- Private companies with investors or lenders
- Companies undergoing audits
- Organizations preparing GAAP-compliant financial statements
Small businesses that operate solely on a tax basis or cash basis may not need to apply ASC 842. However, most companies with external stakeholders must follow the standard.
2. ASC 842 Calculations Are Not as Simple as They Appear
Many companies initially assumed ASC 842 calculations were straightforward. At first glance, the process appears simple: discount the lease cash flows and record the liability.
In reality, the calculation is far more complex.
For companies with large lease portfolios, the challenges multiply quickly.
Lease Data Is Often Incomplete
Lease data rarely lives in one place. Instead, companies often manage information across:
- Lease documents
- Real estate systems
- Accounting spreadsheets
- Property management reports
Before any calculation can occur, companies must first clean and validate their lease data.
Embedded Leases Create Hidden Obligations
Another challenge involves embedded leases.
Contracts that appear to be service agreements may contain an identifiable leased asset. Examples include:
- Dedicated warehouse space in logistics contracts
- Equipment within service agreements
- Data center or telecom infrastructure
These arrangements can fall within the scope of ASC 842, even when the word “lease” never appears in the contract.
Lease Incentives Are Often Misunderstood
Lease incentives also create confusion.
A common example is a tenant improvement allowance (TIA). Companies must determine when the incentive should be recognized and how it affects the lease asset and liability.
Incorrect treatment can materially affect financial statements.
Selecting the Correct Discount Rate Is Challenging
ASC 842 requires companies to discount lease payments using an appropriate rate.
In theory, the preferred rate is the incremental borrowing rate (IBR). However, determining the correct rate is rarely simple.
Many companies lack a clear borrowing benchmark for each lease term and geography. As a result, we often see companies apply a premium to the risk-free rate to approximate their borrowing cost.
This step requires judgment and documentation to withstand audit review.
3. Lease Accounting Software Is Not Always the Complete Solution
When ASC 842 was introduced, dozens of new software providers entered the market.
Many companies adopted these tools quickly to automate lease calculations and reporting.
However, not all solutions provide the same capabilities.
Some Platforms Focus Only on Accounting
Certain systems focus almost exclusively on accounting outputs, such as:
- Lease liability calculations
- Amortization schedules
- Disclosure reports
While these functions are essential, they often ignore the real estate management side of the lease lifecycle.
Lease Administration and Lease Accounting Are Connected
For companies with large real estate portfolios, lease accounting cannot operate in isolation.
Real estate teams manage:
- Lease negotiations
- Amendments and extensions
- Expansion or contraction rights
- Terminations and buyouts
Each of these events can trigger an ASC 842 lease modification.
If lease accounting software does not integrate with lease administration processes, companies risk missing important changes that affect financial reporting.
Successful organizations recognize that lease administration and lease accounting must operate together.
4. Communication Between Real Estate and Accounting Is Critical
Before ASC 842, accounting teams could often operate independently from real estate teams.
That is no longer the case.
Today, changes to a lease agreement can immediately affect the balance sheet.
Examples include:
- Lease amendments
- Rent adjustments
- Extensions or early terminations
- Additional space added to a lease
- Landlord incentives
Without proper communication, accounting teams may not receive the information required to update their ASC 842 calculations.
Creating Structured Communication
One of the most effective solutions is implementing a formal ASC 842 communication process.
At National Lease Advisors, we often serve as the bridge between real estate and accounting teams.
For many clients, we develop an ASC 842 lease modification checklist. When a lease changes, the checklist ensures that accounting receives all required information, including:
- Updated lease terms
- Revised rent schedules
- Incentives or concessions
- Lease commencement or modification dates
This structured approach helps companies maintain accurate financial reporting.
5. Sustainable Processes Are the Key to Long-Term Compliance
ASC 842 is not a one-time project. It requires ongoing management.
Companies that succeed long term typically build repeatable processes that support both lease administration and lease accounting.
Strong programs often include:
- A centralized lease database
- Standardized lease abstraction procedures
- Defined communication workflows between teams
- Periodic lease data audits
- Documented discount rate methodology
- Structured reporting processes
Without these processes, companies often fall back into spreadsheets and manual workarounds, which increases risk.
How National Lease Advisors Supports Accounting Teams
At National Lease Advisors, our role extends beyond the initial ASC 842 implementation.
We support accounting teams by creating the infrastructure required to maintain compliance across large lease portfolios.
Our services can include:
- Lease abstraction and data validation
- Lease database management
- ASC 842 calculations and reporting
- Monthly journal entry preparation
- Balance sheet reporting
- Financial disclosure reports
- Audit support and documentation
By aligning lease administration with accounting processes, companies gain better visibility into their real estate obligations while maintaining accurate financial reporting.
Final Thoughts
ASC 842 transformed lease accounting, but implementation was only the beginning.
Companies that manage real estate portfolios must now focus on sustainable systems, strong communication, and reliable lease data to maintain compliance.
Organizations that treat ASC 842 as an ongoing operational process, not just an accounting exercise, are far better positioned for long-term success.
For companies seeking support with lease administration or ASC 842 reporting, National Lease Advisors works alongside accounting and real estate teams to build the processes and systems required to manage complex lease portfolios with confidence.