ASC 842 in 2026: 7 Lease Accounting Issues Private Companies Should Review Before Year-End

Published Oct 4, 2026

GOMEZ CPA | Insights

For most private companies, adopting ASC 842 is no longer the challenge. Maintaining accurate lease accounting after implementation is.

What is ASC 842?

ASC 842, Leases, is the U.S. GAAP accounting standard issued by the Financial Accounting Standards Board (FASB) that governs the recognition, measurement, presentation and disclosure of leases. For lessees, one of its most significant changes from prior U.S. GAAP was bringing most leases onto the balance sheet through recognition of a right-of-use (ROU) asset and a corresponding lease liability. ASC 842 also establishes requirements for identifying whether a contract contains a lease, classifying leases, measuring lease obligations, accounting for modifications and reassessments, and providing financial statement disclosures. For private companies, the standard is no longer principally an adoption exercise; it is an ongoing accounting and internal-control process as leases and business circumstances change.

A company may have established its right-of-use (ROU) assets and lease liabilities when it adopted ASC 842, but lease accounting does not become automatic after that initial exercise. New contracts are signed. Existing leases are modified. Renewal assumptions change. Locations are closed or expanded. Equipment is replaced. Tenant improvement allowances are negotiated. And agreements that do not have the word “lease” in their title may nevertheless contain a lease for accounting purposes.

Those developments can affect a company's balance sheet, income statement, disclosures and financial ratios. As companies prepare for 2026 year-end financial reporting, management should consider whether its lease accounting process is capturing what has changed during the year, not merely whether last year's lease schedule continues to roll forward.

1. Look Beyond Contracts Labeled “Lease”

One of the first questions under ASC 842 is whether a contract is, or contains, a lease. Under ASC 842-10-15-3, a contract is or contains a lease when it conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. Under ASC 842-10-15-4, control generally requires both the right to obtain substantially all of the economic benefits from use of the identified asset and the right to direct its use. Additional guidance is contained in ASC 842-10-15-9 through 15-26.

That analysis is relatively straightforward when a business rents an office building or leases a vehicle. It can become more difficult when the right to use an asset is embedded within a broader service agreement. Potential examples include warehousing and dedicated storage space, transportation and dedicated vehicles, manufacturing or production equipment, information technology and data-center equipment, and outsourced operations.

A contract does not have to be labeled a “lease” to fall within ASC 842. Conversely, the mere use of a supplier's equipment in providing a service does not necessarily mean the customer controls an identified asset. The practical problem is often organizational: accounting cannot analyze a contract it never sees.

Common-control arrangements require additional attention. Private entities may elect the ASC 842 practical expedient for determining whether certain common-control arrangements contain leases based on their written terms and conditions. ASC 842 also contains specialized guidance for leasehold improvements associated with common-control leases. Companies with related-party real estate or equipment arrangements should consider whether those provisions apply.

Year-end consideration: Companies should consider whether new and amended contracts entered into during 2026 have been screened for potential embedded leases rather than limiting the review to agreements formally labeled as leases.

2. Review Lease-Term Assumptions When ASC 842 Requires Reassessment

The contractual term of an agreement and its accounting lease term are not necessarily the same. Under ASC 842-10-30-1, the lease term begins with the noncancellable period and also incorporates specified optional periods. Among other things, periods covered by a lessee renewal option are included when the lessee is reasonably certain to exercise that option, while periods covered by an option to terminate are included when the lessee is reasonably certain not to exercise the termination option.

Determining whether exercise is reasonably certain can require judgment. ASC 842-10-30-2 through 30-3 and ASC 842-10-55-26 address economic factors relevant to that assessment, including contract terms, significant leasehold improvements, relocation costs and the importance of the asset to operations.

ASC 842 does not require a lessee to reconsider its lease term simply because another reporting period has ended. After commencement, ASC 842-10-35-1 specifies circumstances requiring a lessee to reassess the lease term or a purchase option. When a required reassessment changes the lease term or certain option conclusions, additional accounting can follow, including remeasurement under ASC 842-20-35-4 through 35-5 and, where applicable, reassessment of lease classification under ASC 842-10-25-1.

Year-end consideration: Determine whether events during 2026 triggered reassessment under ASC 842 rather than simply carrying forward prior assumptions or reassessing them automatically without a triggering event.

3. Don’t Treat Every Lease Change as a Simple Schedule Update

Lease modifications are another common source of errors. A modification can change leased space, lease term, consideration, assets or rights of use, or other contractual rights and obligations.

Under ASC 842-10-25-8, a modification is accounted for as a separate contract when it grants the lessee an additional right of use not included in the original lease and the increase in lease payments is commensurate with the standalone price for that additional right of use, adjusted for the circumstances. If those conditions are not met, the modification generally is accounted for as part of the existing lease rather than as a separate contract. ASC 842-10-25-9 requires reassessment of lease classification as of the effective date of a modification that is not accounted for as a separate contract. ASC 842-10-25-11 through 25-13 address lessee reallocation, remeasurement and changes in scope.

Lease-accounting software should implement, not determine, the accounting conclusion. Management first must determine the substance of the modification and the applicable ASC 842 requirements.

Year-end consideration: Reconcile amendments, extensions, contractions, partial terminations and other renegotiations executed during 2026 to the lease-accounting records and document the accounting conclusion for significant modifications.

4. Make Sure Discount Rates Are Appropriate for New and Remeasured Leases

Under ASC 842-20-30-3, a lessee uses the rate implicit in the lease when that rate is readily determinable. When it is not readily determinable, the lessee generally uses its incremental borrowing rate.

A lessee that is not a public business entity may elect under ASC 842-20-30-3 to use a risk-free discount rate instead of its incremental borrowing rate when the rate implicit in the lease is not readily determinable. The election may be made by class of underlying asset and uses a risk-free rate for a period comparable with the lease term. A lessee making the risk-free-rate election also must disclose the election and the class or classes of underlying assets to which it applies.

The rate selected can materially affect the recorded lease liability and ROU asset, particularly for longer-term leases. New leases, modifications and certain remeasurement events require determining whether an updated discount rate is required under ASC 842. For some remeasurement events, the existing discount rate continues to apply.

Year-end consideration: Verify that discount rates used for leases commencing, modified or remeasured during 2026 are supported by the company's accounting policy and the applicable ASC 842 requirements.

5. Analyze Tenant Improvement Allowances and the Commencement Date Carefully

Tenant improvement arrangements can produce accounting results that are not obvious from the terminology used in the lease agreement. Depending on the facts, analysis may be required to determine which party is the accounting owner of improvements and whether amounts provided by the lessor represent lease incentives or relate to improvements owned by the lessor.

For a lessee, ASC 842-20-30-5 provides the framework for initial measurement of the ROU asset, including the initial lease liability, lease payments made at or before commencement less lease incentives received, and qualifying initial direct costs.

The ASC 842 Master Glossary defines the commencement date as the date the lessor makes the underlying asset available for use by the lessee. ASC 842-10-55-19 through 55-21 provide additional implementation guidance. Accordingly, commencement is not necessarily the first day rent becomes payable. Depending on the facts, access to space for construction of lessee improvements may mean the lease has commenced before contractual rent payments begin.

Year-end consideration: For significant build-outs and new locations during 2026, review landlord-funded amounts, lease incentives and the accounting ownership of improvements, and verify that commencement reflects when the underlying asset became available for use.

6. Consider ROU-Asset Impairment When Operations Change

ASC 842-20-35-9 requires a lessee to determine whether an ROU asset is impaired and to recognize an impairment loss in accordance with ASC 360-10-35, the impairment guidance for long-lived assets.

This can become relevant when a company closes a location, substantially reduces use of leased property, relocates operations, abandons leased space, subleases a facility or otherwise changes how an underlying leased asset will be used. A decision to stop using leased property does not by itself eliminate the contractual lease liability.

An impairment indicator also does not automatically require a lease-term reassessment. Lease-term reassessment is governed by ASC 842-10-35-1, while impairment of the ROU asset is governed by ASC 842-20-35-9 and ASC 360-10-35.

Year-end consideration: Ask management, operations and facilities personnel whether leased locations or assets were closed, abandoned, subleased or designated for a significant change in use during 2026.

7. Treat the Lease Schedule as an Accounting Subledger, Not Just a Spreadsheet

For companies with multiple leases, the lease schedule should be managed much like an accounting subledger. It should reconcile to the general ledger and reflect beginning ROU assets and lease liabilities, new leases, lease payments, modifications and remeasurements, terminations, impairment and other relevant adjustments, and ending balances.

For lessees, ASC 842-20-50-1 establishes the overall disclosure objective: providing users with information that enables them to assess the amount, timing and uncertainty of cash flows arising from leases. ASC 842-20-50-3 addresses information about the nature of leases and significant assumptions and judgments, while ASC 842-20-50-4 through 50-6 contain significant quantitative requirements.

Year-end consideration: Reconcile the lease records to the general ledger and applicable financial statement disclosures, and investigate unexplained differences before the financial statements are issued.

A Practical 2026 ASC 842 Year-End Checklist

Completeness: Have all new leases and contracts potentially containing embedded leases been identified and evaluated under ASC 842-10-15-2 through 15-27?
Modifications: Were all amendments, extensions, reductions, partial terminations and other contractual changes communicated to accounting and evaluated under ASC 842-10-25-8 through 25-18?
Lease term: Did any events occur that require reassessment under ASC 842-10-35-1?
Discount rates: Are rates used for new or remeasured leases supported and consistent with ASC 842-20-30-3 and company policy?
Tenant improvements and commencement: Were landlord allowances, lease incentives and leasehold improvements appropriately analyzed, and was commencement determined under the ASC 842 Master Glossary and ASC 842-10-55-19 through 55-21?
Changes in use and impairment: Were closed, abandoned, relocated or subleased locations evaluated under ASC 842-20-35-9 and ASC 360-10-35?
Reconciliation: Do the ROU asset and lease liability schedules reconcile to the general ledger?
Disclosures: Do the financial statement disclosures agree to the underlying lease records and satisfy applicable ASC 842-20-50 requirements?

Why ASC 842 Remains an Ongoing Accounting Issue

ASC 842 has been in effect for private companies for several years. That can create a false sense that lease accounting has become routine. The continuing challenge is different from the original implementation challenge.

After implementation, changes occur one contract at a time throughout the year. A new equipment agreement may be negotiated by operations. A real estate lease may be amended by management. A renewal option may be exercised without accounting being notified. A landlord may fund improvements to a new location. A facility may close months before the lease expires.

Individually, none of those events may appear to be an accounting project. Collectively, they determine whether the company's ASC 842 balances and disclosures remain accurate. Effective compliance therefore depends on controls and communication among accounting, operations, procurement, legal and management, not merely on having lease-accounting software.

How Gomez CPA Can Help

Gomez CPA works with businesses that need experienced accounting and financial reporting support without necessarily maintaining those resources entirely in-house.

For companies applying ASC 842, that assistance can include reviewing lease agreements and modifications, maintaining lease schedules, reconciling ROU assets and lease liabilities to the general ledger, evaluating unusual lease transactions, assisting with year-end adjustments, and supporting preparation of financial statement disclosures.

The objective is not simply to calculate a lease liability once a year. It is to establish a repeatable accounting process that keeps lease information accurate as the business changes. If your company has added locations, renegotiated leases, entered into significant equipment arrangements or experienced other changes during 2026, year-end is an appropriate time to determine whether the accounting records have kept pace.

Technical References and Further Reading

Authoritative guidance

Financial Accounting Standards Board, Accounting Standards Codification Topic 842, Leases.
Financial Accounting Standards Board, ASC 360-10-35, Property, Plant, and Equipment—Impairment or Disposal of Long-Lived Assets.
Financial Accounting Standards Board, ASU 2023-01, Leases (Topic 842): Common Control Arrangements.
Financial Accounting Standards Board, Post-Implementation Review: Leases (Topic 842), November 2025.

Professional interpretive guidance

KPMG LLP, Handbook: Leases, September 2026.
Deloitte & Touche LLP, Roadmap: Leases, August 2026.
BDO USA, Accounting for Leases Under ASC 842, updated January 2026.

Disclaimer

This article provides general information concerning accounting and financial reporting matters and is not intended to constitute accounting, audit, tax, legal or other professional advice. The application of ASC 842 depends on an entity's specific facts and circumstances, contractual arrangements, accounting policies and applicable financial reporting requirements. Businesses should consult qualified professional advisers regarding their particular circumstances.

Information is current as of October 2026.