Whether your business operates from a leased office space, runs production equipment under contract, or even rents a fleet of copiers, understanding lease accounting has never been more critical. The days of simply logging rent as an expense are gone. Modern accounting standards require businesses to treat leases as assets and liabilities, providing a clearer picture of financial obligations.
For companies looking to scale responsibly, this change isn’t just about compliance. It’s about smarter financial management that supports sustainable business growth.
The New Era of Lease Accounting
Before 2019, lease accounting was fairly straightforward: operating leases (like office space or copiers) were treated as off-balance-sheet expenses. Companies would record monthly payments and move on.
However, with the introduction of ASC 842 (for U.S. companies) and IFRS 16 (for international entities), nearly all leases now must appear on the balance sheet. This shift aims to improve transparency and comparability between companies by showing the full scope of lease-related obligations.
These standards require that each lease be split into two parts:
- Lease Liability: The total future payments you’re obligated to make.
- Right-of-Use Asset: The economic benefit your business receives from using the leased asset.
Understanding how to properly account for both is key to accurate reporting and strategic financial planning.
What Counts as a Lease?
You might be surprised by what qualifies. Lease obligations extend far beyond commercial property. Under ASC 842 and IFRS 16, any contract that gives your business control over the use of an asset for a specific period in exchange for payment is a lease.
That includes:
- Office, retail, or warehouse spaces
- Manufacturing or construction equipment
- Copiers, printers, and IT hardware
- Vehicles and transport fleets
- Long-term software and server hosting contracts
If your business benefits from exclusive access to a piece of equipment or property, regardless of whether it’s physical or digital, it likely needs to be recorded under these new accounting rules.
The Role of Right-of-Use Assets
When you sign a lease, you don’t own the asset, but you do have the right to use it. This is where the concept of right of use (ROU) assets comes into play.
A right-of-use asset represents the present value of the lease over its term, adjusted for any prepayments or incentives. It’s recorded on the balance sheet alongside a corresponding lease liability.
Here’s how it typically works:
- You determine the total value of future lease payments.
- You discount that amount using your company’s incremental borrowing rate.
- You record that discounted amount as both an asset and a liability.
Over time, you’ll depreciate the ROU asset (just like owned equipment) and reduce the lease liability as payments are made.
This process ensures your financial statements show not only what you owe but also what you’re getting in return.
The Impact on Small and Mid-Sized Businesses
While these changes were designed with large corporations in mind, small and medium-sized enterprises (SMEs) are also affected.
According to Deloitte’s 2024 Financial Reporting Survey, nearly 62% of mid-sized businesses found the transition to lease accounting standards “more complex and time-consuming” than expected.
For SMEs, the biggest challenges include:
- Identifying all qualifying leases (especially embedded ones in contracts)
- Tracking lease renewals, modifications, and variable terms
- Calculating accurate discount rates
- Integrating lease data across accounting systems
Without automation or specialized software, maintaining compliance can quickly become overwhelming especially for companies managing dozens of leases across equipment, property, and technology.
Common Pitfalls in Lease Accounting
Even experienced accountants can miss key details when managing leases under ASC 842 or IFRS 16. The most common mistakes include:
- Ignoring short-term or low-value leases: Even smaller leases can have cumulative impacts on financial statements.
- Failing to track modifications: Lease extensions, renegotiations, or asset swaps must be remeasured under the new rules.
- Overlooking embedded leases: Many service contracts (like data centers or equipment maintenance) contain lease components that need to be reported.
- Inconsistent discount rates: Using inaccurate rates can significantly distort both ROU asset and liability values.
- Poor documentation: Missing contracts, incomplete payment schedules, or outdated data lead to compliance risk.
Avoiding these pitfalls requires structured processes and the right technology.
Leveraging Technology for Smarter Lease Management
Manual spreadsheets no longer cut it when it comes to lease accounting. Automation and integration are now essential to handle the complexity of compliance and long-term planning.
Lease accounting software can simplify every step of the process by:
- Centralizing all lease contracts in a searchable database
- Automatically calculating liabilities and right-of-use assets
- Generating journal entries compliant with ASC 842 and IFRS 16
- Tracking modifications, renewals, and terminations
- Syncing data directly with ERP or accounting platforms
These systems reduce human error and free up time for strategic decision-making. For CFOs and finance teams, automation means less time chasing paperwork and more time focusing on growth and analysis.
Strategic Benefits of Accurate Lease Accounting
Properly managing leases isn’t just about meeting regulations, it’s a strategic advantage. Accurate lease accounting can improve financial visibility, support smarter investment decisions, and strengthen your company’s credibility with investors and lenders.
Here’s how:
- Cash Flow Optimization: By clearly mapping payment timelines, businesses can plan for liquidity more effectively.
- Cost Control: Identifying underused or redundant leases helps reduce overhead.
- Asset Utilization: Tracking ROU assets ensures maximum efficiency across departments.
- Performance Benchmarking: Consistent lease reporting provides better insights into long-term costs versus ownership.
- Investor Transparency: Clear, standardized financials increase confidence and funding potential.
For growing organizations, these insights help align financial structure with strategic goals, laying a strong foundation for sustainable business growth.
When to Bring in Professional Help
Even with automation, lease accounting can be nuanced especially for companies with diverse assets and international operations. Engaging accountants or consultants experienced with ASC 842 and IFRS 16 can ensure your business remains compliant and efficient.
Professionals can help:
- Review and classify lease agreements
- Develop internal policies for lease tracking
- Select and implement the right accounting software
- Conduct periodic audits to verify accuracy
It’s an investment that pays for itself by preventing costly errors and ensuring your financial reports reflect reality.
Final Thoughts
From office copiers to multi-year real estate contracts, leases are the quiet backbone of business operations. Managing them properly isn’t just about compliance, it’s about understanding your company’s true financial landscape.
Accurate accounting for lease liabilities and right of use assets gives businesses the clarity needed to make confident decisions, optimize resources, and plan for the future.
When handled correctly, lease management transforms from a back-office function into a strategic lever for transparency, efficiency, and lasting success.
Last Updated on October 22, 2025 by Ash