Short answer: staying compliant with ASC 842 comes down to six things. Find every lease, including leases hidden inside service contracts. Classify each one. Measure the lease liability and right of use (ROU) asset at commencement with a documented discount rate and lease term. Post the periodic entries every month. Catch every remeasurement event when it happens. Then build the disclosures from a lease register that agrees with the general ledger. The last two are the steps most likely to slip.
ASC 842 has applied to public business entities for fiscal years starting after December 15, 2018, and to most other entities for fiscal years starting after December 15, 2021. By 2026, every US GAAP reporter should be applying it. The hard part now is keeping it right month after month as leases are signed, changed and renewed.
This guide is for controllers and lease accounting leads at real estate companies. It focuses on setup and the disclosures. For the basics of the standard, read what ASC 842 is and why it matters for property companies first.
Step 1: Find every lease
A real estate company usually sits on both sides of ASC 842. It is a lessor to its tenants, and a lessee for its own offices, ground leases, equipment and vehicles. Start with a full inventory of lessee arrangements, because a missed lease is a missed liability.
Look in these places:
- Office and site space the company rents for itself
- Ground leases under owned or managed buildings
- Equipment, vehicle and IT leases
- Service contracts that give you control of a specific asset, such as a dedicated storage unit or a named generator. These can contain an embedded lease.
- Leases with related parties, such as an operating company renting from an owner's property LLC
Decide your policy elections early and write them down. Common ones for lessees are the short term lease election (leases of 12 months or less with no purchase option you are reasonably certain to exercise stay off the balance sheet) and the choice to combine lease and non lease components by class of asset.
Step 2: Classify each lease
A lessee classifies a lease as a finance lease if any one of five tests is met at commencement:
- Ownership transfers to the lessee by the end of the term.
- There is a purchase option the lessee is reasonably certain to exercise.
- The term is for the major part of the asset's remaining economic life. Many companies use 75% as a reasonable threshold.
- The present value of the payments, plus any residual value guarantee, equals or exceeds substantially all of the asset's fair value. Many companies use 90%.
- The asset is so specialized that it has no other use to the lessor at the end of the term.
If none apply, it is an operating lease. Most office and site leases held by real estate companies are operating leases. Long ground leases and sale and leaseback deals need a closer look.
Lessors classify leases as sales type, direct financing or operating. Most tenant leases granted by property owners are operating leases. The lessor side is covered in our guide to ASC 842 lessor lease classification.
Step 3: Measure at commencement
The lease liability is the present value of the lease payments not yet paid. The ROU asset starts at the liability amount, plus payments made at or before commencement and initial direct costs, minus lease incentives received.
The commencement date is the date the lessor makes the asset available to you. That is often earlier than the date rent starts, for example when you get early access for a fit out. Our post on lease commencement vs rent commencement explains why the difference matters.
Which payments go in
- Fixed payments, less incentives receivable
- Variable payments that depend on an index or rate, measured using the index or rate at commencement
- The exercise price of a purchase option you are reasonably certain to exercise
- Termination penalties, if the lease term assumes you will terminate
- Amounts probable of being owed under a residual value guarantee
Variable payments that do not depend on an index or rate stay out of the liability. Percentage rent based on sales and CAM charges based on actual costs are the usual examples. They are expensed as incurred.
The discount rate
Use the rate implicit in the lease if you can readily determine it. Lessees often cannot, because it depends on the lessor's view of the property's residual value. If not, use your incremental borrowing rate: the rate you would pay to borrow, on a secured basis over a similar term, an amount equal to the lease payments.
Lessees that are not public business entities can elect a risk free rate instead, and since ASU 2021-09 they can make that election by class of underlying asset. A lower rate gives a higher liability, so model the effect before you choose.
Document how you got each rate. A one point difference on a 20 year ground lease can move the liability by a large amount, and auditors will ask.
The lease term
The term is the non cancellable period, plus renewal periods you are reasonably certain to exercise, plus periods after a termination option you are reasonably certain not to exercise. "Reasonably certain" is a high bar. Write down the factors you weighed: the value of your leasehold improvements, how important the location is, and what it would cost to move.
Step 4: Post the entries every period
The mechanics differ by lease type:
- Operating lease. You recognize one straight line lease cost over the term. The liability grows by interest at the discount rate and falls by the payments. The ROU asset is reduced by the difference between the straight line cost and the interest on the liability.
- Finance lease. You recognize interest on the liability using the effective interest method, and amortize the ROU asset separately, usually on a straight line basis. Total cost is higher in the early years.
When the lease register drives these entries from the commencement inputs, nobody has to rebuild the schedule each month. For worked lessor entries, see ASC 842 lessor journal entries with examples.
Step 5: Catch every remeasurement event
A lessee remeasures the liability, and adjusts the ROU asset by the same amount, when one of these happens:
- A modification that is not accounted for as a separate contract
- A change in the lease term, for example after a significant event within your control makes a renewal reasonably certain
- A change in whether you are reasonably certain to exercise a purchase option
- A change in the amount probable of being owed under a residual value guarantee
- A contingency is resolved so that some variable payments become fixed
Two points often go wrong:
- Index changes alone do not trigger remeasurement under ASC 842. If CPI raises the rent, the extra amount is variable lease cost until the liability is remeasured for another reason. IFRS 16 works differently, which trips up groups that report under both.
- A modification is a separate contract when it grants an additional right of use and the price rises by an amount in line with that right's standalone price. Otherwise, remeasure the existing lease using a discount rate updated at the modification date.
The common failure here is timing. A renewal is signed in March, nobody tells accounting, and the error grows until the auditor finds it in January. Route every lease amendment, renewal notice and option exercise to the lease accountant the week it happens.
Step 6: Build the disclosures
Lessee disclosures
- Lease cost: finance lease amortization and interest, operating lease cost, short term lease cost, variable lease cost and sublease income
- Balance sheet amounts: ROU assets and lease liabilities, split between current and non current, on the face of the balance sheet or in the notes
- Maturity analysis: undiscounted payments for each of the next five years and the total after that, for operating and finance leases separately, reconciled to the recorded liability
- Weighted averages: remaining lease term and discount rate, for operating and finance leases separately
- Cash flow and other information: cash paid for amounts in the lease liabilities, split by operating and financing cash flows, and ROU assets obtained in exchange for new lease liabilities
- Qualitative information: the nature of your leases, how variable payments are set, renewal and termination options, residual value guarantees and significant judgments
Describe lease categories separately when their terms differ. A 20 year ground lease and a 3 year vehicle lease need different descriptions.
Lessor disclosures
- Lease income: operating lease income, plus profit or loss at commencement and interest income for sales type and direct financing leases, and income from variable payments not included in the lease receivable
- Maturity analysis: undiscounted lease payments to be received for each of the next five years and the total after that, with operating leases shown separately
- Residual asset risk: how you manage the risk on the property you get back at the end of the lease
- Qualitative information: the nature of your leases and significant judgments
The disclosure source map
Disclosures go wrong when they are rebuilt from the general ledger in January. Map each one to its source now, and test that the data exists before year end.
| Disclosure | Data it needs | Where it comes from | Check before year end |
|---|---|---|---|
| Lease cost table | Cost by type: operating, finance interest, finance amortization, short term, variable, sublease income | Separate GL accounts for each cost type | Table total agrees with total lease expense in the income statement |
| Maturity analysis | Remaining payments by year for every active lease | Lease register payment schedules | Undiscounted total less imputed interest equals the recorded liability |
| Weighted average term and rate | Remaining term, discount rate and liability for each lease | Lease register | Leases added or changed in the year are included |
| Cash paid and new ROU assets | Payments applied to lease liabilities; ROU assets from new leases and remeasurements | Payment records and the register's event log | Split between operating and financing cash flows agrees with the cash flow statement |
| Lessor lease income | Fixed rent, straight line adjustments, variable rent such as percentage rent and recoveries | Tenant billing, coded by charge type | Charge types map to the disclosure lines with no "other" bucket |
| Lessor maturity analysis | Fixed future rent by tenant lease | Rent schedules on tenant leases | Agrees with the rent roll at the reporting date |
If a row has no clear source, fix that in the system now. In January, the fix is a spreadsheet.
2026 note: leases between related entities
Real estate groups often lease property between companies under common control. ASU 2023-01, effective for fiscal years starting after December 15, 2023, changed two things:
- Private companies, and some not for profit entities, may use the written terms and conditions of a common control arrangement to decide whether a lease exists and how to classify and account for it.
- For all entities, leasehold improvements in a common control lease are amortized over their useful life to the common control group, rather than the lease term, while the lessee controls the use of the asset. If the lessee stops controlling the asset, the remaining balance is treated as a transfer between the entities through equity.
Check that related party leases in your register follow these rules. See the FASB's summary of ASU 2023-01.
Month end and year end checklist
- New leases that commenced this period are in the register with their initial measurement
- Amendments, renewals and option exercises received this period are processed
- Interest, amortization and straight line entries are posted for every active lease
- Payments are applied to the right lease liabilities
- Register balances agree with the general ledger for ROU assets and lease liabilities
- Discount rate and lease term judgments for new leases are documented
- At year end: every row of the disclosure source map ties to the financial statements
What auditors test
- Completeness: whether every lease, including embedded and related party leases, is in the register
- Discount rates: whether each rate is reasonable and supported
- Lease terms: whether renewal assumptions are backed by evidence
- Remeasurements: whether amendments during the year were processed in the right period
- Disclosures: whether the tables agree with the register and the ledger
Undocumented judgments found during fieldwork can lead to extra audit procedures, which add time and fees. Have the support ready before the auditors arrive.
Where RIOO fits
RIOO is built natively on NetSuite and covers the landlord side of ASC 842. RIOO lease accounting for ASC 842 and IFRS 16 works from the tenant lease records your property team already keeps: classification support, straight line income, incentives, modifications recalculated from the effective date, variable rent such as percentage rent and recoveries, and maturity analysis data for the lessor disclosures. Journals post to NetSuite with a link back to the lease.
For leases where your company is the tenant, such as its own offices, NetSuite offers lessee lease accounting for ROU assets and lease liabilities. Many groups use both in the same account, so the lessor and lessee sides share one ledger.
Frequently asked questions
What is the difference between an ROU asset and a lease liability?
The lease liability is the present value of the lease payments not yet paid. The ROU asset is your right to use the asset over the term. It starts at the liability amount, adjusted for prepaid rent, initial direct costs and incentives received.
What discount rate should a private real estate company use?
The rate implicit in the lease if readily determinable, otherwise the incremental borrowing rate. Private companies can elect a risk free rate by class of underlying asset. That is simpler but usually gives a higher liability.
Does a CPI rent increase trigger remeasurement under ASC 842?
No, not by itself. The increase is treated as variable lease cost until the liability is remeasured for another reason, such as a modification or a change in lease term. IFRS 16 handles this differently.
When is a lease modification treated as a separate lease?
When it grants an additional right of use and the price rises by an amount in line with that right's standalone price. Otherwise, the existing lease is remeasured using an updated discount rate.
What ASC 842 disclosures do real estate lessors need?
A table of lease income by type, a maturity analysis of undiscounted payments to be received, how residual asset risk is managed, and qualitative information about the leases and key judgments.
What changed for ASC 842 in recent years?
ASU 2021-09 lets private company lessees elect the risk free rate by class of asset. ASU 2023-01 covers leases between entities under common control, including how leasehold improvements are amortized.
This article is general information, not accounting advice. Confirm your policies and elections with your auditor or accounting adviser.
