FRS 102 Leases: Summary & Example with Journal Entries

The threshold for “Likely to be Exercised” is fairly high, so it is unlikely to be met at inception unless the original lease term is quite short. Management should discuss the new standard with the users of its financial Interior Design Bookkeeping statements, even if the dollar impact has not yet been determined. With advance notice, users will have more time to understand the impact and adjust to the change.

ASC 842 Journal Entries for Operating Leases

Edited by CPAs for CPAs, it aims to provide accounting and other financial professionals with the information and analysis they need to succeed in today’s business environment. Under IFRS 16, all lessee leases are classified as finance leases, which will not require lessees to perform any analysis of the five criteria outlined above. Under ASC 842, lease incentives reduce the initial value of the ROU asset, rather than being recognized as income. As you can see above both approaches result in similar end values for the lease liability and right-of-use asset but the method to arrive at the values is slightly different. As of May 31, 2025 the remaining lease liability and right-of-use asset were $6,201,663.09 and $6,043,626.29 respectively. During 2025 XYZ Shipping encountered rough financial times and had to downsize their headcount drastically.

Lease Modification Accounting under ASC 842: Operating Lease to Operating Lease

• Updating the general ledger involves making necessary adjustments to reflect all transactions accurately.
• Therefore, verbal modification agreements are no longer considered for the lease accounting, and in such cases the recorded assets and liabilities will be higher than if the modification were in writing.
• Contact us today to learn more about how we can assist you in navigating lease terminations and compliance with ASC 842.
• This occurs when, for whatever reason, the lessee abruptly terminates the lease.
• Since these costs are often not included in calculating the lease payments, they must be added to the carrying value of the underlying asset, which requires calculation of new discount rate.
• In addition, the disclosure requirements are much more extensive in the new standard, meaning companies will need to compile more information about their leases for disclosure.

The lease liability should be allocated between the terminated and non-terminated portions of the lease based on the online bookkeeping relative fair value or by using the allocation based on the remaining lease payments. The ROU asset should also be adjusted accordingly to reflect the changes in the lease liability. Any gain or loss resulting from the partial lease termination is recognized in the Income Statement.

Preparing the Final Accounts

For example, a lessee leases 3 floors in an office building and vacates one of the leased floors. A gain/loss calculation is required when there is a reduction in the right of use asset. Before any adjusting entries can be made at year-end, the lessor must compute a new discount rate in lease termination journal entry order to amortize the components comprising the net investment in the lease.

Initial Recognition: Recording the Lease at the Start

• Check “send to accounting feed” if you want the information sent to the ERP system when the status is moved to Active.
• Step 3 of the wizard is where we get the opportunity to input various a couple of values that are not housed in other areas of the lease record, that will have an impact on your calculation.For example, here you can bring in an initial prepaid rent.
• If any of the criteria described above are met, then the lease is classified as a finance lease.
• This includes paying off any outstanding liabilities such as taxes, debts, and vendor invoices.
• Simply add a modification and these calculations will be automatically taken care of.
• For the above lease example, the monthly straight-line lease expense is $8,895.40.

It includes both the initial lease term and any additional periods that are reasonably certain to be exercised, such as renewal options. Any difference between the reduction in the lease liability and the proportionate reduction in the right-of-use asset shall be recognized as a gain or a loss at the effective date of the modification. Like many aspects of lease accounting on face value, the accounting appears straightforward.

For commercial tenants, CPAs, and accounting & finance teams, creation of your journal entries are a month-end task. Select Termination as the type of remeasurement and then select Partial as the Type of Termination. When creating a partial termination, the Method of Termination, Effective Date, and End Date must be specified.