Definition
ASC 842 allows a lessee to elect not to recognize a right-of-use asset and lease liability for a short-term lease: a lease with a term of 12 months or less at commencement that does not include a purchase option the lessee is reasonably certain to exercise. The election is made by class of underlying asset. Lease payments are recognized in expense on a straight-line basis over the term, and variable payments in the period incurred. Disclosure of short-term lease cost is still required.
Why it matters in an audit or review
The lease term includes renewal options that are reasonably certain to be exercised, so a twelve-month agreement with an expected renewal may not qualify. Month-to-month arrangements require judgment about the enforceable term and the economic penalties of leaving. Auditors check the policy election, the class of asset, and whether repeated renewals indicate a longer term.
Example
(Illustrative) A company rents equipment for eight months at $5,000 per month. Under the election it records $5,000 of expense monthly and no balance sheet asset or liability. If it had a six-month renewal option it was likely to exercise, the term would be 14 months and the exemption would not apply.
Common mistakes
- Treating a rolling month-to-month lease as automatically short-term.
- Omitting short-term lease cost from the notes.
Sources
- FASB ASC 842-20-25-2 (short-term lease election)
- FASB ASC 842-20-50 (disclosure of short-term lease cost)
- FASB ASC 842-10-30 (lease term, including options reasonably certain to be exercised)
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error