Differences Between ASC 840 and ASC 842: What is Capitalized?



George Azih:

First difference we’ll address is what is capitalized? Under 840, what is capitalized is called your present value of your minimum lease payments. Under 842, you’re gonna be capitalizing your lease payments. What’s the difference there?

Remember I told you earlier under 840, you have what are called executory costs, right? So those executory costs, camp, insurance, tax, etc. Those executory costs are excluded from your minimum lease payments.

Under 842, you do not have the concept of minimum lease payments. You have lease payments, and it is called your fixed consideration. And then if you do have non-lease components, you would need to bifurcate, allocate that fixed consideration into the lease component and the non-lease component.

Ladies and gentlemen, this is where the practical expedient comes in. This is the big misconception I was referring to earlier. Once again, we’ll have a deeper dive on that. Just understand that the concept now is slightly different as to minimum lease payment and lease payment and how you allocate between the two. Now, an allocation is required. So that’s a big difference between current GAAP and 842, and frankly, also IFRS.