Lease Accounting Advisory

ASC 842 — Leases — replaced ASC 840 and requires lessees to recognize a right-of-use asset and a lease liability on the balance sheet for virtually all leases with terms greater than twelve months. Under the old standard, operating leases were off-balance-sheet — only the periodic rent expense appeared in the income statement. Under ASC 842, those same operating leases now appear as assets and liabilities on the balance sheet, which affects financial ratios, debt covenants, and the presentation of financial statements.

The classification determines how the lease affects the income statement and cash flow statement. A finance lease — similar to the old capital lease — results in interest expense and amortization of the ROU asset, with the liability payment split between principal and interest in the cash flow statement. An operating lease results in a single straight-line lease cost in the income statement, with the full payment classified as an operating cash outflow. Finance lease classification is triggered when the lease transfers ownership, contains a purchase option likely to be exercised, covers most of the asset’s useful life, or the present value of payments equals substantially all of the asset’s fair value.

An embedded lease exists within a service or supply contract when the contract conveys the right to control the use of a specific identified asset for a period of time. Common examples include IT outsourcing agreements with dedicated servers, logistics contracts with specific trucks or warehouses, and manufacturing agreements with dedicated equipment. Companies often overlook embedded leases because they are not labeled as leases — but if the arrangement gives the customer the right to direct how and for what purpose the asset is used, it likely contains a lease under ASC 842.

The lessee should use the rate implicit in the lease if that rate can be readily determined. In most cases it cannot, so lessees use their incremental borrowing rate — the rate they would pay to borrow a similar amount over a similar term, collateralized by assets similar to the leased asset. For private companies that elect the practical expedient, a risk-free rate may be used instead. Determining an appropriate incremental borrowing rate requires judgment and documentation.

A lease modification is a change in the scope or the consideration of a lease that was not part of the original terms. Depending on the nature of the modification — whether it grants additional right-of-use, removes right-of-use, or changes the consideration without changing the scope — it may be accounted for as a separate new lease or as a remeasurement of the existing lease liability and ROU asset. We analyze the specific facts and document the accounting conclusion.

For companies with large lease portfolios, we start with a lease inventory — identifying all leases across the organization, including embedded leases in service contracts. We then assess each lease, calculate the ROU assets and liabilities, determine practical expedient elections, and prepare the transition journal entries. We typically work with lease accounting software to manage the ongoing calculations and produce the required disclosures efficiently.

Yes. We regularly work with foreign private issuers and companies with cross-border structures, including IFRS reporting, US GAAP reconciliations, and multi-entity consolidations for companies with domestic and international subsidiaries.

In most cases, we can begin within a few days of finalizing our agreement. Our onboarding process is straightforward — a brief discovery session, a clear statement of work, and secure access setup. We do not have lengthy intake procedures that delay the start of actual work.