Lease Accounting Under ASC 842: Common Pitfalls for Private Companies

ASC 842 is no longer new, but for private companies it is now fully in effect — and implementations still trip up even experienced teams. Here are the pitfalls we see most often, and how to avoid them.

A 30-second recap

Under ASC 842, nearly all leases — operating and finance — go on the balance sheet as a right-of-use (ROU) asset and a corresponding lease liability. The income-statement pattern differs between operating and finance leases, but the balance-sheet recognition is the headline change.

Common pitfalls

• Incomplete lease inventory. Leases hide inside service contracts and equipment arrangements (embedded leases). Missing them understates liabilities.
• The wrong discount rate. Private companies may elect a risk-free rate, but that can inflate the liability; the incremental borrowing rate is often more appropriate. Document your policy and apply it consistently.
• Misapplied elections. The short-term-lease exemption and practical expedients are helpful but frequently applied incorrectly.
• Ignoring modifications and reassessments. Renewals, terminations, and scope changes require remeasurement — this is an ongoing process, not a one-time entry.
• Related-party leases. Account for these based on the enforceable terms of the written contract.
• Disclosure gaps. The qualitative and quantitative disclosures are extensive and often the last thing teams complete.

What to do

• Build and maintain a complete lease inventory, including embedded leases.
• Document your discount-rate policy and elections in a memo.
• Establish a process for ongoing modifications and reassessments.
• Draft disclosures early, not at the finish line.

Keep your skills current

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This article is general information for tax and accounting professionals and is not legal, tax, or accounting advice. Rules, dollar thresholds, and state provisions change and vary — always confirm current figures and requirements with the IRS, your state authority, the FASB/AICPA, or qualified counsel before acting or advising clients.