How to Account for Lessee Finance and Operating Agreements: ASC 842
Most CPAs grapple with leases from the lesseeโs point of view, so in this post, weโll look at finance…
Businesses often lease assets or property when they donโt have the money to purchase them outright.
Some leases create assets and liabilities. Why? Well standard setters (e.g., FASB) see such agreements as a means of financing the use of assets. So it makes sense that the agreements will often have a impact on the balance sheet.
So whether a government, nonprofit, or business leases assets, the lessee will record an asset and liability at the inception of the agreement. Then over time, the assets are reduced and the liability falls as payments are made. ย A lease expense affects the income statement as payments are made. And sometimes other expenses such as depreciation or amortization can impact the operating statement.
The Financial Accounting Standards Board and the Governmental Accounting Standards Board have separate lease standards. So you need to look at those depending on the type of entity you are working with. Both boards have moved in the direction of requiring lessees to record an asset and a liability at the inception of the agreement. There are exceptions such as leases that are less than a year in length.
Most CPAs grapple with leases from the lesseeโs point of view, so in this post, weโll look at finance…
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