The new lease accounting standard addresses the recognition of a single lease expense over the term of the lease for operating leases in ASC 842-20-25-6: This method of rent expense recognition is applicable under both ASC 840 and ASC 842 for leases classified as operating leases. Under current US GAAP, the FASB states that when rents are not constant, the lease expense should be recognized on a straight-line basis throughout the life of the lease. Called lease expense under ASC 842, this aggregated expense is recorded in the operating section of the income statement. A lease expense, equivalent to the straight-line rent expense recognized under ASC 840 for operating leases, is recognized for time value discount of the lease liability and amortization of the ROU asset for operating leases. Lease payments decrease the lease liability. Under ASC 842, organizations record a lease liability equal to the present value of the remaining lease payments and a right-of-use asset equal to the lease liability with certain adjustments. Organizations now have to record both an asset and a liability for their operating leases. However, recent updates have complicated lease accounting. At a high level, the lessee, or tenant, would have recorded a debit to rent expense and a credit to cash to represent the expense for the usage of the asset underlying the lease agreement incurred during the period and payment for that expense in the same period.
Under ASC 840, accounting for rent was simple for operating leases. How has accounting for rent payments changed under ASC 842? Other times organizations rent different types of vehicles or equipment – such as office or maintenance equipment – because they require more flexibility than ownership offers. Sometimes rent expense can be incurred for buildings, warehouses, or offices occupied by the organization. For many companies, rent is a significant expense incurred to support their business. Rent expense is an expense account representing the cost incurred by an organization for the right to use or occupy a specified asset that they do not own. It also explains the appropriate recognition of rent expense, including an example demonstrating rent expense measurement, at the end of the article. This article discusses what rent expense is and how the new lease accounting standard, ASC 842, affects the presentation of rent expense in the financial statements.
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