Practice for US Auditors

Summary

This contents shares brief explanation of ASC 842 lease accounting so that 1st year accountant would understand how it works.

Index

1. Brief overview
2. Scope of Lease Accounting

Brief overview

Scope of Lease Accounting

This section explains what would be the subject of ASC 842 lease accounting

It is important to know how to determine if a contact to be a lease or contain a lease to determine whether you should apply the lease accounting.

The criteria for a contract to be determined as lease, both of the criteria below must be met:

1. The contract must depend on an identifiable asset in which the lessor does not have a substantive substitution right.
2. The contract must convey the right to control the use of asset over the lease term to the lessee. The lessee will have the right to obtain substantially all of the economic benefits from using the asset and have the right to direct its use.

Easy understanding Criteria No.1 is simply saying that in order for a contract to be a lease, you must have know what you are leasing in the contract. If you cannot identify what you are leasing, it is not subject to lease accounting. Criteria No.2 Let’s say you lease a car. While the lease term, you can drive anywhere in the U.S., perhaps use it as showcase car or car camping, that is “right to control the use of asset” and “have the right to direct its use”. You used the leased car for showcase event and earned fee from the event. The lessor does not come to you and claim 50% of earned fee from you, that is “the right to obtain substantially all of the economic benefit from using the asset”