ASC 842 and ASC 326: what changed and why auditors treat them together

• Describe the core model of ASC 842 for lessees and lessors
• Describe the expected credit loss model in ASC 326 and the assets it reaches
• Identify the points where the two standards interact
• Plan which accounts and estimates in a client file each standard touches

Two standards, one theme

ASU 2016-02 created Topic 842, Leases, and ASU 2016-13 created Topic 326, Financial Instruments, Credit Losses. They were issued in February and June of 2016 and both moved amounts that used to live in footnotes or in management's head onto the face of the balance sheet. For a private company the first brought operating leases on balance sheet; the second replaced the incurred loss model with an estimate of credit losses expected over the life of the asset.

Both are now effective for every entity. Topic 842 took effect for private companies and not-for-profit entities that are not conduit bond obligors for fiscal years beginning after December 15, 2021 (ASU 2020-05). Topic 326 took effect for private companies for fiscal years beginning after December 15, 2022 (ASU 2019-10). Your clients are past adoption, so the work now is applying the standards each year and auditing the judgments they require.

The lease model in one paragraph

A contract is or contains a lease if it conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration (842-10-15-3). A lessee recognizes a right-of-use (ROU) asset and a lease liability for every lease except short-term leases it elects to keep off balance sheet. Classification as finance or operating changes the income statement pattern, not whether the lease is recognized. A lessor classifies a lease as sales-type when it meets any of the same five criteria in 842-10-25-2. If none is met, the lessor classifies it as direct financing or operating under 842-10-25-3.

The credit loss model in one paragraph

Topic 326 requires an allowance for credit losses on financial assets measured at amortized cost, including trade receivables from Topic 606 contracts, held-to-maturity debt securities, loans, and a lessor's net investment in leases (326-20-15-2). The allowance reflects expected losses over the contractual term using past events, current conditions and reasonable and supportable forecasts (326-20-30-7). Available-for-sale debt securities are outside the CECL subtopic and follow Subtopic 326-30 instead.

Where they meet

• Lessor receivables. A lessor's net investment in a sales-type or direct financing lease is in the scope of 326-20. Operating lease receivables are not (ASU 2018-19 added that exclusion to 326-20-15-3); they are assessed under the Topic 842 collectibility guidance.
• Discount rates and credit. The lessee's incremental borrowing rate reflects its own credit standing, and the lessor's collectibility assessment affects classification and income recognition.
• Estimates and AU-C 540. Lease term, discount rate, and the allowance all sit in the population of accounting estimates the auditor must assess for estimation uncertainty, complexity and subjectivity.

How this track runs

Lessons 2 through 9 cover Topic 842: identifying a lease, classification, lessee measurement and the discount rate, short-term and other expedients including common control arrangements, subsequent measurement, modifications, lessor accounting, and auditing leases. Lessons 10 through 14 cover Topic 326: scope and the CECL model, pooling and methods, trade receivables and ASU 2025-05, AFS debt securities and purchased credit-deteriorated assets, and auditing the allowance. The ASC 842 guide and the CECL guide give a faster reference view.

What to do on the next file

1. Pull the lease listing and the receivables aging at the planning stage, not at fieldwork.
2. Ask which policy elections the client made at adoption: short-term lease exemption, combining lease and nonlease components, risk-free rate by asset class, and any CECL expedients.
3. Confirm those elections are disclosed and applied consistently.
4. Flag the lease term, discount rate and allowance as estimates in your risk assessment.

Planning a first-year audit for Ridgeway Freight, Inc.