Where the New Lease Accounting Standards Stand Today When discussing lease accounting standards, “new” is a relative term. ASC 842 took effect for public business entities in fiscal years beginning after 15 December 2018. ASU 2020-05 pushed private companies and private not-for-profits to fiscal years beginning after 15 December 2021, so a calendar-year private company adopted on 1 January 2022. Outside US GAAP, IFRS 16 has applied since 1 January 2019. GASB 87 covers state and local governments for fiscal years beginning after 15 June 2021. And the rules keep moving. The FRC’s periodic review brought on-balance-sheet lessee accounting to FRS 102 for periods beginning on or after 1 January 2026. So who’s still implementing? Most teams fall into one of four groups: Newly formed, acquired, or newly reporting entities adopting for the first time Companies that adopted fast in 2022 and now need to remediate or document better Teams moving off spreadsheets after an audit finding or a jump in portfolio size Entities under IFRS 16 or GASB 87 running the same project plan with different rules The same seven steps apply to all four groups, with a few differences under IFRS 16 and GASB 87. Step 1: Build a Complete Lease Inventory Every number in your lease accounting starts with the inventory. Miss a lease here, and it’s missing from the balance sheet, the disclosures, and the audit file. Start with the obvious categories: real estate, vehicles, and equipment. Then look for embedded leases inside service contracts. Common places to check: Logistics and shipping contracts that dedicate specific trucks, railcars, or vessels to you Hosting or data center agreements tied to dedicated, identified servers Utility and supply contracts, such as power purchase agreements tied to a specific facility Test every candidate against the same three questions. Is there an identified asset? Do you get substantially all of its economic benefits during the term? Do you have the right to direct how and for what purpose it’s used? If all three answers are yes, you have a lease. Before auditors test completeness, run your own check. Reconcile the rent and lease expense accounts in the general ledger, plus the AP vendor list, against the inventory. Any recurring payment without a matching lease record needs an explanation. For each lease, capture: Commencement date, term, and renewal, termination, and purchase options Fixed payments, escalations, and variable payments tied to an index or rate Incentives, initial direct costs, and prepaid rent Lease and non-lease components Currency and legal entity Link each data point to the clause it came from. That link saves hours when an auditor asks where a number came from. Step 2: Set Accounting Policies and Elections Teams make most ASC 842 elections by class of underlying asset, and they’re hard to reverse. Once teams have adopted, changing course usually means a change in accounting principle under ASC 250. Put every decision in a policy memo before you run a single calculation. Decide these up front: Short-term exemption. Leases of 12 months or less, with no purchase option you’re reasonably certain to exercise, can stay off the balance sheet. You make this election by asset class. Combining lease and non-lease components. Combining saves allocation work but raises the liability, because service fees get capitalized along with rent. Risk-free rate for private companies. ASU 2021-09 lets entities that aren’t public business entities elect the risk-free rate by asset class instead of entity-wide. You must disclose which classes use it. Portfolio approach. You can apply one discount rate to a group of similar leases when the result wouldn’t differ materially from lease-by-lease accounting. Capitalization threshold. This is a company policy, not an election in the standard. Support it with a materiality analysis. IFRS 16 adds a low-value exemption, applied lease by lease. GASB 87 defines a short-term lease by its maximum possible term, including extension options, regardless of how likely you are to exercise them. Practitioner tip: share the memo with your auditor before you start calculating. A disagreement about elections costs far less to resolve now than after you’ve measured 300 leases. Step 3: Determine Discount Rates The discount rate drives the size of every lease liability, so it gets close attention in audits. Use the rate implicit in the lease when it’s readily determinable. For most lessees, it isn’t, because the lessor’s residual value assumptions and costs aren’t visible. In that case, use your incremental borrowing rate (IBR): the rate you’d pay to borrow on a collateralized basis, over a similar term, for a similar amount. Private companies can elect the risk-free rate instead. It’s simpler to support, but it’s usually lower than an IBR, which means a larger liability. For example, a company could use the risk-free rate for high-volume, low-dollar classes like equipment and its IBR for real estate. To keep rates consistent and auditable: Build a rate table by term band and currency Set a refresh cadence, such as quarterly or whenever a new lease commences Keep the support (yield curves, bank quotes, credit spread reasoning) in one place IFRS 16 has no risk-free rate option. Lessees use the implicit rate or their IBR. GASB 87 uses the rate the lessor charges and falls back to the government’s estimated incremental borrowing rate. Step 4: Choose a Transition Approach ASC 842 requires a modified retrospective transition. ASU 2018-11 gives you two choices for the date you first apply it: The beginning of the earliest comparative period. You restate comparatives under ASC 842. The effective date. You book a cumulative-effect adjustment to opening retained earnings and leave comparatives under ASC 840. Full retrospective application is an IFRS 16 option. ASC 842 doesn’t offer it. Next, decide on the package of practical expedients. It covers three things: whether existing contracts contain leases, how existing leases are classified, and whether initial direct costs still qualify. You elect all three or none. The package lets you keep past conclusions without re-testing them, but it doesn’t protect mistakes. As RSM notes, errors from applying ASC 840 incorrectly, such as missed embedded leases, can’t ride into ASC 842 under the expedients. Your opening entries pull old balances into the new model. Deferred rent, prepaid rent, and unamortized incentives roll into the right-of-use (ROU) asset. Former capital leases become finance leases. Step 5: Classify and Measure Each Lease Under ASC 842, a lease is a finance lease if it meets any one of five criteria: Ownership transfers to you by the end of the term You’re reasonably certain to exercise a purchase option The term covers a major part of the asset’s remaining economic life The present value of payments (plus any residual value guarantee) equals or exceeds substantially all of the asset’s fair value The asset is so specialized that the lessor has no alternative use for it If none apply, it’s an operating lease. Our ASC 842 summary covers each criterion in more detail. Measurement works the same way for both types. The lease liability is the present value of remaining lease payments. The ROU asset starts at the liability, then adds prepaid rent and initial direct costs and subtracts incentives received. Example Take a three-year lease with annual payments of $100,000, paid at the end of each year, and a 6% discount rate. No prepaid rent, direct costs, or incentives. The lease liability at commencement is $267,301. The ROU asset is the same. Year Operating lease cost Finance lease: amortization Finance lease: interest Finance lease: total cost 1 $100,000 $89,100 $16,038 $105,138 2 $100,000 $89,100 $11,000 $100,101 3 $100,000 $89,100 $5,660 $94,761 Total $300,000 $267,301 $32,699 $300,000 Figures round to the nearest dollar, so some rows differ by $1. Both types cost $300,000 over the term. The difference is timing and presentation. Operating leases recognize one straight-line cost. Finance leases front-load cost through interest and show it on two lines. IFRS 16 and GASB 87 drop this split for lessees. Every capitalized lease follows the amortization-plus-interest pattern. Step 6: Post Journal Entries and Prepare Disclosures At commencement, the entry is the same for both types: debit the ROU asset and credit the lease liability. In the example above, both sides are $267,301. After that, the paths split: Operating leases show a single lease cost line on a straight-line basis. ROU asset amortization is the balancing figure. Finance leases show interest expense on the liability and amortization of the ROU asset as separate lines. Build disclosures as a roll-forward tied to the ledger, so every figure in the footnote traces back to a balance you’ve already reconciled. ASC 842 lessee disclosures include: Lease cost by component: finance lease amortization and interest, operating lease cost, short-term lease cost, and variable lease cost Weighted-average remaining lease term and weighted-average discount rate, by lease type Cash paid for amounts included in lease liabilities ROU assets obtained in exchange for new lease liabilities A maturity analysis of undiscounted payments for each of the next five years and thereafter, reconciled to the liability on the balance sheet Private companies using the risk-free rate also disclose that election and the asset classes it covers. Step 7: Build Controls and Audit Evidence Expect your auditor to ask for five things: Evidence the lease inventory is complete A tie-out from contract terms to calculations The signed policy memo Discount rate support Disclosure tie-outs to the general ledger Controls keep that evidence current after go-live. Put these in place: New lease approval that routes every signed lease to accounting Modification notices, so amendments, extensions, and early terminations reach accounting before period-end Periodic reassessment of lease terms and options Independent review of calculations A change log on lease data Aim for a trail an outsider can follow: source clause, extracted term, calculation, journal entry, disclosure. When every link holds, audit requests turn into quick lookups. Spreadsheets, Software, or AI: How to Decide Under the new lease accounting standards, spreadsheets can work for a handful of simple leases with stable terms. They strain when the portfolio grows, when modifications pile up, when multiple currencies or entities enter the picture, or when auditors want to trace a number back to a contract. Whatever you choose, hold it to the same requirements: Calculations traceable to the source clause A full change log Updates when the standard or guidance changes Disclosure-ready reports Export to your ERP A security attestation, such as a SOC report AI earns its place on the data side. It can extract terms from contracts in any format, from scanned PDFs to spreadsheets, and flag missing data before it reaches a calculation. Judgment stays with your team. Lease term, option assessments, and classification depend on facts and intent that only the business knows. Trullion is an AI-powered accounting platform that helps teams manage lease, revenue, and audit workflows in one auditable system. Each extracted term stays linked to its source, so the trail from contract to disclosure is built as you work. Built for ASC 842, IFRS 16, and FRS 102, Trullion automates contract data, modifications, and reporting for accuracy, compliance, and efficiency across complex lease portfolios. Explore our lease accounting offerings or talk to a team member today. FAQs How long does it take to implement ASC 842? It depends on portfolio size, data quality, and how many embedded leases you find. A small portfolio of clean real estate leases can move fast. Multiple entities, currencies, and scattered contracts take longer. The inventory step usually takes the most time, so start there early. Is ASC 842 mandatory for private companies? Yes. ASC 842 applies to private companies that report under US GAAP for fiscal years beginning after 15 December 2021. Do I need lease accounting software to comply with ASC 842? No. The standard doesn’t require software. Spreadsheets can work for a few simple leases. As portfolios grow and audits ask for traceability, software that links calculations to source documents reduces manual work and review risk. What’s the difference between ASC 842 and IFRS 16 for implementation? ASC 842 keeps two lessee lease types, operating and finance. IFRS 16 uses one model that treats nearly all leases like finance leases. IFRS 16 also offers a low-value exemption and a full retrospective transition option, while ASC 842 offers a risk-free rate election for private companies.