A Case Study Of Accounting Standards Codification 842 Lease Accounting

The inception of Accounting Standards Codification (ASC) 840 in 1977, involving the off-balance sheet treatment of most leases, resulted in decades of controversy. Recent US GAAP (Generally Accepted Accounting Principles) changes introduced significant modifications to lease accounting for public companies. The new ASC 842 rules became effective for periods beginning after December 15, 2018. The new rules require capitalization of all non-cancellable leases with terms greater than one year in duration. Liabilities created by the lease contract now become a balance sheet debt item resulting in a significant financial statement effect. Indeed, this recharacterization may produce a significant negative impact on a firm’s debt ratios and covenant agreements. The combined effects of these changes may significantly affect the way entities conduct business. This case study focuses on differences in the treatment of leases under old lease accounting conventions and the new lease rules under US GAAP. The case requires students to examine the impact of these differences on financial statements and selected financial ratios. Students begin with GAAP financial statements under the old lease requirements and prepare a balance sheet and income statement and cash flow, reflecting the new lease rules. Designed for use at both the undergraduate and graduate levels, this case study may be appropriuate for an Intermediate Accounting II, Accounting Theory, Financial Statement Analysis, or an International Accounting class.