Lease accounting under ASC 842 fundamentally changed how private companies report rent, equipment leases, and facility agreements.
If your company rents office space, warehouse facilities, vehicles, or machinery, those agreements likely require capitalization on the balance sheet.
Many businesses implemented ASC 842 reactively during audit season. However, proper documentation, calculation methodology, and disclosure compliance remain ongoing responsibilities.
If you are searching for an ASC 842 compliance CPA in Michigan, here is what you need to know.
What Is ASC 842?
ASC 842 is the Financial Accounting Standards Board (FASB) lease accounting standard that requires most leases longer than 12 months to be recognized on the balance sheet.
Under previous guidance (ASC 840), operating leases were generally disclosed in footnotes but not recorded as liabilities. ASC 842 changed that.
Today, companies must recognize:
- A Right-of-Use (ROU) Asset
- A Lease Liability
This applies to private companies, nonprofits, and many closely held businesses across Michigan.
Why ASC 842 Compliance Matters
ASC 842 does not change your cash flow. It changes how financial obligations are reported.
Improper implementation can affect:
- Debt-to-equity ratios
- Working capital
- Loan covenant compliance
- Financial statement audit outcomes
- Bank reporting requirements
We regularly see companies discover compliance gaps during year-end audit procedures — particularly around embedded leases and discount rate assumptions.
An experienced ASC 842 compliance CPA ensures your lease accounting under GAAP is defensible, documented, and audit-ready.
Does Your Lease Require Capitalization? (ASC 842 Evaluation Framework)
Most leases longer than 12 months must be recorded. The evaluation requires technical analysis.
1. Is There an Identified Asset?
Examples:
- A specific office suite
- A designated warehouse
- A named vehicle or equipment unit
If the contract specifies a distinct asset and the supplier cannot substitute it without substantive economic consequence, it likely meets the identified asset test.
2. Does Your Company Control the Asset?
Control exists when your company:
- Directs how and for what purpose the asset is used
- Receives substantially all economic benefits
If control remains with the vendor, the arrangement may be a service contract rather than a lease.
3. Is the Lease Term Greater Than 12 Months?
Leases exceeding 12 months generally require capitalization.
Important technical consideration:
Renewal periods must be included if you are reasonably certain to exercise the renewal option.
This judgment area is frequently scrutinized during financial statement audits.
Common ASC 842 Compliance Errors
As a Michigan CPA firm providing audit and advisory services, we commonly see:
- Failure to identify embedded leases in service contracts
- Incorrect discount rate selection
- Inconsistent application of the risk-free rate practical expedient
- Omission of renewal periods
- Incomplete maturity analyses in disclosures
- Lack of formal ASC 842 documentation
These issues can lead to audit adjustments or lender concerns.
How to Implement ASC 842 Properly
Step 1: Perform a Complete Lease Inventory
Identify:
- Real estate leases
- Equipment and machinery agreements
- Fleet vehicle contracts
- IT and copier agreements
- Service contracts containing embedded leases
A contract review process is essential.
Step 2: Calculate Lease Liability (Present Value Methodology)
Lease liabilities must be measured at the present value of future lease payments using:
- The incremental borrowing rate (IBR), or
- The risk-free rate (if elected under the private company practical expedient)
This election must be consistently applied by asset class and formally documented.
Step 3: Record the Initial ASC 842 Journal Entry
At transition or commencement:
- Debit: Right-of-Use Asset
- Credit: Lease Liability
This increases total assets and total liabilities without affecting cash.
Communication with lenders is recommended before financial statements are issued.
Step 4: Ensure GAAP-Compliant Disclosures
ASC 842 requires expanded disclosures, including:
- Weighted-average remaining lease term
- Weighted-average discount rate
- Lease liability maturity schedule
- Cash flow classification
- Qualitative lease descriptions
Incomplete disclosures are one of the most common audit findings.
Financial Statement and Loan Covenant Implications
While operating leases generally do not affect EBITDA classification, ASC 842 can impact:
- Debt-to-equity ratios
- Current ratio
- Return on assets
- Working capital metrics
Companies with banking relationships should model covenant impact before finalizing financial statements.
ASC 842 Compliance for Michigan Private Companies
Businesses in Metro Detroit, and throughout Michigan face unique lender scrutiny, especially in industries such as:
- Construction
- Manufacturing
- Nonprofits with facility leases
- Distribution and warehousing
- Professional services
If your organization undergoes an annual financial statement audit or review, ASC 842 documentation must be audit-ready.
ASC 842 Compliance CPA Services – IKRG CPAs & Consultants, PC
IKRG CPAs & Consultants, PC is a Michigan CPA firm providing:
- ASC 842 implementation and transition support
- Lease inventory and contract review
- Embedded lease analysis
- Lease liability and ROU asset calculations
- Risk-free rate and IBR analysis
- GAAP-compliant financial statement disclosures
- Audit preparation support
- Lender communication assistance
We work with private companies and nonprofits throughout Metro Detroit, across Michigan and beyond to ensure lease accounting compliance under GAAP.
If your business has not formally documented its ASC 842 analysis — or if implementation occurred without technical oversight — now is the time to review your compliance position.
Schedule an ASC 842 Compliance Review
IKRG CPAs & Consultants, PC
32238 Schoolcraft Road, Suite 163
Livonia, MI 48150
📞 (313) 492-4254
📧 info@ikrgcpa.com
If you are searching for an experienced ASC 842 compliance CPA in Michigan, our team can provide a structured review, identify risk areas, and deliver defensible lease accounting documentation.
