FASB ASC 842

FASB ASC 842
Name	FASB ASC 842
Issued by	Financial Accounting Standards Board
Effective date	2019–2022
Replaces	ASC 840
Type	Accounting standard update
Topic	Leases

FASB ASC 842 FASB ASC 842 is a lease accounting standard issued by the Financial Accounting Standards Board that revised lease recognition and disclosure requirements, affecting preparers such as General Electric, Walmart, Apple Inc., JPMorgan Chase and auditors like PricewaterhouseCoopers, Deloitte, KPMG, Ernst & Young. The standard aligns aspects of lease accounting with frameworks used by International Accounting Standards Board, European Commission, Securities and Exchange Commission, Public Company Accounting Oversight Board and institutional investors including BlackRock and Vanguard Group. Implementation timelines forced coordination with systems from Oracle Corporation, SAP SE, Microsoft Corporation and consulting by firms such as Accenture and McKinsey & Company.

Overview

FASB ASC 842 requires lessees such as Ford Motor Company, Delta Air Lines, Amazon (company), The Coca-Cola Company to recognize most leases on the balance sheet, impacting stakeholders like Nasdaq, New York Stock Exchange, Moody's Investors Service, Standard & Poor's and regulators including Federal Reserve System, Office of the Comptroller of the Currency, Commodity Futures Trading Commission, Internal Revenue Service. The change follows earlier projects involving the International Accounting Standards Board and replaces guidance from ASC 840 used by entities such as IBM, Cisco Systems, AT&T. Key policy drivers trace to recommendations by Financial Crisis Inquiry Commission and responses to high-profile cases involving Enron, Lehman Brothers, WorldCom, Parmalat.

Key Provisions

The standard establishes classification tests and recognition criteria for finance and operating leases, drawing on techniques similar to those in IFRS 16 as applied by companies like BP, Shell plc, ExxonMobil and insurers such as AIG and MetLife. Lessees must record right-of-use assets and lease liabilities, affecting balance sheets of Marriott International, Hilton Worldwide, Uber Technologies, Lyft. Lessors retain a dual model akin to receivable and performance obligation approaches used by Walmart Stores, Target Corporation, Home Depot, Lowe's Companies. Disclosure demands require enhanced notes comparable to reporting practices by Johnson & Johnson, Pfizer, Merck & Co., GlaxoSmithKline.

Accounting and Measurement

Measurement requires present value techniques using discount rates with inputs related to market rates from sources like Federal Reserve Bank of New York, Bloomberg L.P., Moody's Investors Service, The Wall Street Journal. Lessees determine lease terms, options, residual values and impairment considerations similar to models used by United Airlines, Delta Air Lines, American Airlines Group and hotel operators such as Choice Hotels. Lessors apply cash flow and derecognition concepts familiar to Bank of America, Citigroup, Goldman Sachs and Morgan Stanley. Transition methods include modified retrospective approaches analogous to those used in major financial restatements at General Motors and Siemens.

Transition and Implementation

Public companies adopted the standard between 2019 and 2022 with staged rollouts by sectors including airlines, retail, technology and banking, requiring coordination with audit committees of Boeing, Airbus, Best Buy, Costco Wholesale Corporation and internal control frameworks influenced by Committee of Sponsoring Organizations of the Treadway Commission and model auditors at Big Four accounting firms. Systems work involved integrations with enterprise resource planning from SAP SE, Oracle Corporation, Infor, and lease administration platforms provided by LeaseQuery and CoStar Group vendors. Regulatory filings to U.S. Securities and Exchange Commission, communications with International Accounting Standards Board and training from organizations like American Institute of Certified Public Accountants were common.

Practical Impact and Industry Responses

The balance sheet recognition altered leverage ratios for corporations such as Tesla, Inc., Ford Motor Company, General Motors and affected covenant calculations used by lenders like Wells Fargo, Citigroup, HSBC, Barclays. Equity analysts at Goldman Sachs, JPMorgan Chase, Evercore, Rothschild & Co. adjusted models, while credit rating agencies including Fitch Ratings and Moody's Investors Service issued guidance on treatment of lease liabilities. Industry trade groups including National Retail Federation, American Hotel & Lodging Association, Airlines for America and professional bodies such as Institute of Management Accountants produced implementation materials and comment letters.

Criticisms and Controversies

Critics including academics at Harvard Business School, Stanford Graduate School of Business, Wharton School, London School of Economics argued the standard increases complexity and judgment, citing concerns similar to debates around Sarbanes–Oxley Act compliance and past accounting controversies like Enron scandal and Lehman Brothers collapse. Preparers and advisors including National Association of Manufacturers and law firms such as Skadden, Arps, Slate, Meagher & Flom LLP raised issues about transition costs, systems burden and impacts on taxation overseen by Internal Revenue Service and legislative scrutiny by United States Congress committees. Debates continue in forums involving Financial Accounting Standards Board, International Accounting Standards Board and professional organizations over possible refinements.

Category:Accounting standards