ASC 842
What is ASC 842?
ASC 842 is the US GAAP lease accounting standard. It requires lessees to record most leases on the balance sheet as a right-of-use asset and a matching lease liability.
Updated November 2026 · 5 min read
ASC 842 is the Financial Accounting Standards Board's standard for lease accounting in the United States. It replaced the earlier standard, ASC 840, under which operating leases were kept off the balance sheet and disclosed only in the notes. Under ASC 842, lessees must recognize nearly all leases longer than twelve months on the balance sheet, giving a much clearer picture of the obligations an organization has taken on.
ASC 842 took effect for public companies in fiscal years beginning after December 15, 2018, and for private companies and most other organizations in fiscal years beginning after December 15, 2021. For IT financial management, it matters because technology organizations lease a great deal: office space, data center colocation, network circuits, equipment and sometimes dedicated hardware embedded within service contracts. Each of these may now carry an asset and a liability on the balance sheet.
Definition of ASC 842
ASC 842 defines a lease as a contract that conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Control means the customer has the right to obtain substantially all of the economic benefits from using the asset and the right to direct how it is used.
For each lease, a lessee records a right-of-use (ROU) asset, representing its right to use the leased asset, and a lease liability, representing the present value of the lease payments it must make. Leases are then classified as either operating or finance leases, which determines how expense is recognized over the lease term.
Right-of-Use Assets and Lease Liabilities
The lease liability is measured as the present value of future lease payments, discounted using the rate implicit in the lease or, if that is not readily determinable, the lessee's incremental borrowing rate. Private companies may elect to use a risk-free rate instead.
The ROU asset generally equals the lease liability, adjusted for items such as prepaid rent, initial direct costs and lease incentives. Over the lease term, the liability is reduced as payments are made, and the asset is reduced through amortization.
Operating and Finance Leases
ASC 842 keeps two types of leases for lessees. A lease is a finance lease if it meets any of five criteria: ownership transfers to the lessee, the lessee has a purchase option it is reasonably certain to exercise, the lease covers a major part of the asset's economic life, the present value of payments amounts to substantially all of the asset's fair value or the asset is so specialized that it has no alternative use to the lessor.
Leases that meet none of these criteria are operating leases. The difference matters for the income statement, as explained in more detail under operating lease vs finance lease. Both types appear on the balance sheet.
Importance of ASC 842 in IT Financial Management
Technology organizations often hold many leases, some obvious and some hidden inside larger contracts. ASC 842 brings these onto the balance sheet, which affects reported assets, liabilities and financial ratios, and it requires accurate data about each lease.
It also affects how technology sourcing decisions are evaluated, since leasing no longer keeps obligations off the balance sheet.
Embedded Leases in Technology Contracts
A technology contract may contain a lease even if it is not called one. A colocation agreement for dedicated cages, a managed services contract that includes servers reserved for one customer or a network agreement for dedicated fiber can all contain embedded leases if the customer controls the use of an identified asset.
Most public cloud and SaaS arrangements do not contain leases, because the provider decides which hardware is used and can substitute it freely. Contracts for managed services and dedicated infrastructure need closer review, since they are more likely to involve identified assets.
Effects on Financial Statements
Bringing leases onto the balance sheet increases both assets and liabilities, which affects ratios such as debt to equity and return on assets. For organizations with large data center or office leases, the increase can be substantial.
Expense patterns also differ by lease type. Operating leases produce a single, straight-line lease cost, while finance leases produce amortization and interest, with higher total expense in early years. Both affect EBITDA differently, which matters for comparing leasing with buying or with capex vs opex alternatives.
How to Apply ASC 842
Applying ASC 842 requires identifying all leases, collecting the data needed to measure them and maintaining records over each lease's life. Most organizations use lease accounting software to manage the calculations and disclosures.
IT finance teams play an important part, since many technology contracts need to be assessed for embedded leases.
Identifying and Recording Leases
Organizations should review contracts across procurement, real estate and IT to identify leases, including embedded ones. Contract repositories and contract lifecycle management (CLM) systems make this easier by providing a single place to search agreements and track key terms.
For each lease, the organization records the commencement date, term, payments, renewal and purchase options, discount rate and classification. Practical expedients allow short-term leases of twelve months or less to be kept off the balance sheet, and allow lease and non-lease components, such as maintenance, to be combined if elected by asset class.
Maintaining Leases Over Time
Leases change. Renewals, early terminations, expansions and changes in payments all require remeasurement of the lease liability and ROU asset. Processes should ensure that changes in technology contracts are communicated to the accounting team when they happen.
Organizations should also review ROU assets for impairment when they stop using leased assets, for example when a data center is vacated before its lease ends.
Examples of ASC 842 in IT Financial Management
The examples below show how ASC 842 applies to technology arrangements.
Both use illustrative figures and simplified calculations.
In each, the key question is whether the organization controls the use of an identified asset.
A Data Center Colocation Lease
A company signs a five-year colocation agreement for a dedicated cage at a fixed monthly fee of $40,000. The cage is a specific, identified space that the company controls, so the agreement contains a lease. Discounting the $2.4 million of payments at a 6 percent annual rate gives a lease liability of about $2.07 million.
The company records a ROU asset and lease liability of about $2.07 million. As an operating lease, it recognizes a straight-line lease cost of $40,000 a month, or $480,000 a year, while the asset and liability decline over the term.
A Cloud Contract With No Lease
A company commits to spend $3 million over three years with a public cloud provider. The provider determines which servers run its workloads and can move them at any time, so there is no identified asset under the company's control.
The arrangement is a service contract, not a lease. Costs are expensed as services are consumed, and the commitment is disclosed as a purchase obligation where required, but nothing is recorded on the balance sheet under ASC 842.
Conclusion
ASC 842 is the US GAAP lease accounting standard. It requires lessees to recognize most leases on the balance sheet as right-of-use assets and lease liabilities, classifies them as operating or finance leases and requires detailed disclosures.
In IT financial management, ASC 842 affects colocation, network, equipment and dedicated managed service contracts, including leases embedded within broader agreements. Identifying these leases, recording them accurately and maintaining them as contracts change keeps financial statements accurate and gives leaders a clear view of technology obligations.
Related terms
Operating Lease vs Finance Lease
Operating lease vs finance lease is the distinction between leases that give only the use of an asset and leases that transfer most of its economics, accounted for like a financed purchase.
Managed Services
Managed services are ongoing IT functions delivered by an external provider for a recurring fee under defined service levels, such as network monitoring, security operations, cloud management or end-user support.
CapEx vs OpEx
CapEx vs OpEx is the distinction between capital expenditures, which buy long-term assets and are depreciated over time, and operating expenses, which cover day-to-day costs and are expensed immediately.
Contract Lifecycle Management (CLM)
Contract lifecycle management (CLM) is the process, and often the software, used to manage contracts from request and drafting through negotiation, approval, signature, obligations, renewal and expiry.