FAR coverage for ASC 842 lessee accounting, lessor accounting, sale-leasebacks, lease measurement, and disclosure.
Lease accounting under ASC 842 is tested in FAR because classification changes the pattern of expense, revenue, asset recognition, liability measurement, and disclosure. The same contract can create different accounting questions depending on whether the candidate is analyzing the lessee, the lessor, a sale-leaseback, or the related note disclosure.
The first step is to identify whether the arrangement contains a lease: the customer must control the use of an identified asset for a period of time in exchange for consideration. After that, the exam usually turns on classification and measurement. Lessees generally recognize right-of-use assets and lease liabilities for both finance and operating leases. Lessors classify leases based on whether the arrangement transfers control or substantially all of the economic benefits of the underlying asset.
| Lesson | Main question | What to master |
|---|---|---|
| Lessee Accounting for Finance and Operating Leases | How does the user of the asset classify and measure the lease? | ROU assets, lease liabilities, finance criteria, operating lease cost, and short-term lease elections |
| Lessor Accounting for Sales-Type, Direct Financing, and Operating Leases | How does the asset owner classify and recognize the arrangement? | Sales-type leases, direct financing leases, operating leases, selling profit, and net investment accounting |
| Sale-Leaseback Transaction Accounting | Did the transfer qualify as a sale before the leaseback? | Failed sales, financing treatment, retained control, gain recognition, and leaseback classification |
| Lease Disclosure Requirements Under ASC 842 | What information explains lease amount, timing, and uncertainty? | Maturity analysis, weighted-average term, discount rates, variable payments, and qualitative judgments |
flowchart TB
A["Arrangement may contain a lease"] --> B{"Identified asset and control of use?"}
B -->|"No"| C["Account for nonlease arrangement under other guidance"]
B -->|"Yes"| D{"Perspective?"}
D -->|"Lessee"| E["Classify as finance or operating"]
D -->|"Lessor"| F["Classify as sales-type, direct financing, or operating"]
E --> G["Measure ROU asset and lease liability"]
F --> H["Determine receivable, net investment, or continued asset accounting"]
G --> I["Apply ASC 842 presentation and disclosure"]
H --> I
| Checkpoint | Ask before calculating | Why it matters on FAR |
|---|---|---|
| Identified asset | Does the customer control the use of a specified asset for a period of time? | If no lease exists, ASC 842 classification and measurement do not apply. |
| Party perspective | Is the question asking for lessee accounting, lessor accounting, sale-leaseback treatment, or disclosure? | The same contract can produce different journal entries for each party. |
| Classification criteria | Do transfer of ownership, purchase options, lease term, present value, or specialized nature affect classification? | Classification drives expense pattern, revenue recognition, and balance sheet effects. |
| Measurement inputs | Which payments, incentives, initial direct costs, residual guarantees, and discount rate belong in measurement? | Lease liability and net investment errors often come from including or excluding the wrong cash flows. |
| Modification or reassessment | Did terms change, options become reasonably certain, or assumptions require reassessment? | Later changes can alter measurement, classification, or disclosure without creating a new unrelated lease. |