Question

Consider that the key difference in revenue recognition under ASC 605 vs 606 is that ASC 605 focused on transferring risks and rewards, but ASC 606 focuses on transferring control. How is the difference in control under ASC 840 vs 842 similar or different to this?

Answer 1

FASB changed how leases are identified. ASC 842 defines a lease as—a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment (an identified asset) for a period of time in exchange for consideration. In contrast, ASC 840 defines a lease as—an agreement conveying the right to use property, plant or equipment (land and/or depreciable assets) usually for a stated period of time.

While on its face the definition of a lease appears not to have changed in substance, that seeming lack of a change disguises the fact that ASC 842 will change significantly how leases are identified.

Under ASC 842, a contract is, or contains, a lease if the customer (lessee) has the right to obtain substantially all of the economic benefits from the use of the identified property, plant or equipment (“PP&E”) and the right to direct the use of the identified PP&E throughout the time that the identified PP&E will be used to fulfill the contract with the customer (lessee).