ASC 842 led to changes in the accounting of lease contracts and is a challenge for many companies.
The free Excel template from Contavio helps you understand the leases rules and shows you how to calculate contracts.
The basic postings for lease contracts based on ASC 842 consist of four steps:
The value of the initial Right of Use Asset is the 'present value' of all lease payments during the contract term. A lease payment is a payment that is directly related with the transfer of the leased asset. Payments that are related to other components like services are not classified as lease payments.
The posting is 'Debit: Right of Use Asset' to 'Credit: Lease Liability'.
The Lease Liability gets decreased based on the payments during the contract term. Value and point in time are based on the payment itself without considering potential accruals.
The posting can be 'Debit: Lease Liability' to 'Credit: Cash'. However, in most cases, it will be to 'Credit: Lease Expense' to reduce the existing expenses on the accounts.
The difference between the sum of all payments and the present value (the initial Lease Liability/Right of Use Asset) is the Interest Expense. The Interest Expense is increasing the Lease Liability each month.
The posting usually looks like this: 'Debit: Interest Expense' to 'Credit: Lease Liability'.
Under ASC 842, the Depreciation is getting reduced similarly to the Lease Liability reduction. This means the value of the Lease Liability and Right of Use Asset is usually the same.
The posting can be 'Debit: Right of Use Asset Depreciation' to 'Credit: Right of Use Asset'.
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