What Is ASC 842 and Does Your Small Business Have to Follow It?

Sam's List Editorial | 2026-08-06

What Is ASC 842 and Does Your Small Business Have to Follow It? ASC 842 is the FASB lease accounting standard that requires a company preparing financial statements under US GAAP to put essentially every lease longer than twelve months on its balance sheet, as a right-of-use asset and a matching lease liability. Operating leases that used to live in a footnote now sit on the face of the balance sheet. That is the whole change in one paragraph. What follows is who it applies to, how the numbers get built, and the three places small companies actually get hurt by it. What ASC 842 Changed From the Old Standard Under the prior standard, ASC 840, an operating lease was largely an off-balance-sheet arrangement. You disclosed future minimum payments in a footnote and recognized rent expense as you went. A reader had to find the footnote and do arithmetic to understand the obligation. ASC 842 did not eliminate the operating lease. It moved it. The income statement treatment for an operating lease is still a single, generally straight-line lease cost. What changed is the balance sheet, which now carries the obligation to make those payments and the corresponding right to use the asset. The practical consequence for a small business is not the accounting. It is that total assets and total liabilities both grow, and every ratio computed from them changes. Who Actually Has to Follow ASC 842 This is the question most owners are really asking, and the answer is narrower than the panic suggests. ASC 842 applies to entities preparing financial statements in accordance with US GAAP. That is the trigger. It is not a tax rule, and it is not a law that applies to businesses generally. If your company keeps its books on a cash basis or an income tax basis and has never produced GAAP financial statements, the standard does not reach you. Plenty of profitable small businesses are in exactly that position and will stay there. You get pulled in when a counterparty with real bargaining power asks for GAAP statements. Typically that is a bank writing a covenant that specifies GAAP, an investor, a surety underwriting a bond, a franchisor, a licensing body, or a buyer running diligence. The standard has been effective for private companies for fiscal years beginning after December 15, 2021, so it is not new, but plenty of companies encounter it for the first time when a lender or a buyer asks. The right question is not "does ASC 842 apply to businesses like mine." It is "does anyone require GAAP financial statements from me, now or in the next two years." If yes, this is on your...

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