Accrued Rent Accounting Under ASC 842

Accrued rent accounting under ASC 842 starts from a plain definition: accrued rent is lease cost recognized before the cash is paid. For an operating lease, that balance no longer sits in its own liability account. ASC 842-20-35-3(b) measures the right-of-use (ROU) asset at the lease liability adjusted for prepaid or accrued lease payments, so the accrual lives inside the asset. A separate accrual still appears for variable payments, short-term leases and rent that is due but unpaid.

What does accrued rent mean, and how does it differ from prepaid and deferred rent?

Accrued rent is a timing balance. It builds whenever the income statement runs ahead of the checkbook, and three situations create it.

• Escalating payments. Straight-line cost is level, so early-year cost exceeds early-year cash.
• Payments in arrears. December's rent is paid in January, but December carries the cost.
• Month-end cut-off. The lease month runs from the 15th to the 14th, and the books close on the 31st.

Prepaid rent is the mirror image: cash goes out before the cost is recognized. Rent wired on December 28 for January is the common case. Deferred rent was the ASC 840 label for accrued rent created by straight-lining, usually from free months or step-ups.

The deferred rent guide covers recalculating that balance when a lease is extended. Free months are the other classic source, and the article on rent abatement and rent-free periods works through a lease with three of them.

Why is there no accrued rent liability for an operating lease under ASC 842?

The income statement did not change. ASC 842-20-25-6(a) has an operating lease lessee recognize a single lease cost. The paragraph calculates it "so that the remaining cost of the lease ... is allocated over the remaining lease term on a straight-line basis."

That is the default, not an absolute. The paragraph allows another systematic and rational basis that better reflects the pattern of benefit. It also sets a different calculation once the ROU asset is impaired, which this page does not cover.

ASC 842-20-25-8 builds that remaining cost from total lease payments plus initial direct costs, less cost already recognized.

The balance sheet is what changed. ASC 842-20-35-3(a) measures the operating lease liability "at the present value of the lease payments not yet paid," discounted at the rate set at commencement. That balance follows cash and interest, not straight-line cost.

ASC 842-20-35-3(b) then measures the ROU asset "at the amount of the lease liability, adjusted for" four items. The first item is "Prepaid or accrued lease payments." The others are the remaining balance of lease incentives received, unamortized initial direct costs and impairment. Accrued rent holds the asset below the liability; prepaid rent holds it above.

KPMG's Handbook: Leases (paragraph 6.4.170 and Question 6.4.10) describes two methods that give the same carrying amount. One derives the asset from the liability each period. The other amortizes the asset by straight-line cost less the interest accreted on the liability; PwC's Leases guide (section 4.4) describes the amortization the same way.

Either way, no accrued rent liability survives on the reported balance sheet. A lessee using the first method may still run an accrued rent account in the ledger during the period. KPMG's Question 6.4.10 has that balance reversed into the ROU asset at each reporting date. Under ASC 842-20-35-3(b) the reported asset is already net of the accrual, so a separate liability on top would count the same amount twice.

Worked example: where the accrued rent sits in a 5-year escalating lease

A lessee leases warehouse space for five years. Rent is paid once a year, in arrears, on the last day of each year. The payment is $100,000 in year 1 and rises by $4,000 each year, for $540,000 in total.

The discount rate is the lessee's incremental borrowing rate of 6.0% a year. There are no initial direct costs, incentives or prepayments, and the lease is classified as operating. ASC 842-20-30-1 measures the liability at the present value of the payments not yet paid. With no adjustments under ASC 842-20-30-5, the ROU asset starts at the same amount.

Present values are computed from unrounded factors; the factors are shown to six decimal places. Multiplying by the rounded factors gives $452,974.49, eight cents lower.

Straight-line cost is $540,000 divided by 5, or $108,000 a year. Interest each year is 6.0% of the opening liability. ROU asset amortization is the plug: $108,000 less that year's interest.

Year 5 interest includes a one-cent rounding so the liability closes at zero: 6.0% of $109,433.95 is $6,566.04. Total interest equals total payments less the opening liability, and total amortization equals the opening ROU asset.

Read the last two columns together. By the end of year 1 the lessee has recognized $108,000 of cost and paid $100,000. The $8,000 of accrued rent is exactly the gap between the $380,153.04 liability and the $372,153.04 asset.

The gap peaks at $12,000 at the end of year 2, holds in year 3 when cash equals cost, and unwinds in years 4 and 5. On ASC 840 books that column was the accrued rent liability; ASC 842-20-35-3(b) makes it an adjustment inside the ROU asset.

What entry records the year when straight-line cost runs ahead of cash?

Year 1 on the ASC 842 books takes two entries. The first records the cost, and the second records the payment.

• Debit operating lease cost $108,000.00; credit lease liability $27,178.47 (interest accretion); credit ROU asset $80,821.53
• Debit lease liability $100,000.00; credit cash $100,000.00

Nothing is credited to accrued rent. The ASC 840 entry for the same year debited rent expense for $108,000 and credited cash for $100,000. The other $8,000 was a credit to accrued rent.

That $8,000 has not disappeared. The ROU asset fell by $80,821.53 while the liability fell by only $72,821.53, and the difference is the same $8,000.

The payment in arrears needs no separate accrual at an interim date. It is still inside the lease liability that ASC 842-20-35-3(a) measures. The fuller set of entries for both lease types is in operating and finance lease journal entries.

What happened to the ASC 840 accrued rent balance at transition?

ASC 842-10-65-1(b) sets the effective date for every entity not listed in paragraph (a). For them the standard took effect for fiscal years beginning after December 15, 2021. Interim periods followed, within fiscal years beginning after December 15, 2022. A calendar-year private company adopted on January 1, 2022.

An operating lease with step rents or free months arrived at that date carrying an ASC 840 accrued or deferred rent liability. ASC 842-10-65-1(m) dealt with it.

For a lease that stays operating, the opening ROU asset is the lease liability adjusted for two things. The first reads "The items in paragraph 842-20-35-3(b), as applicable," and the second is any Topic 420 exit-cost liability. Accrued lease payments head the 842-20-35-3(b) list, so the old liability was derecognized against the new asset.

Suppose the example lease had been two years old at adoption, with the rate for the remaining payments also 6.0%. The ASC 840 accrued rent balance is $12,000.

ASC 842-10-65-1(l) measures the transition liability on the remaining minimum rental payments as Topic 840 defined them. It discounts them at a rate set at the application date, which in this example is the adoption date. Here those payments equal the remaining contractual rents, so the liability is the schedule's year 2 balance of $298,962.22. That is the present value of the three remaining payments, within a cent of rounding.

• Debit ROU asset $286,962.22
• Debit accrued rent $12,000.00
• Credit lease liability $298,962.22

Equity is untouched in this case. KPMG's Handbook: Leases shows the same step in Example 13A.3.10. Its transition worksheet derecognizes the accrued rent liability against the ROU asset and shows no adjustment to equity.

The result differs when the package of practical expedients is not elected and the lease is reclassified as a finance lease. Accrued rent still reduces the ROU asset, under ASC 842-10-65-1(o) rather than (m). The difference between the asset and the liability then goes to opening retained earnings, as in KPMG's Example 13A.3.40.

A legacy accrued rent account that still carries a balance for a lease on the ASC 842 schedule is a sign this entry may have been missed. The deferred rent guide works through the same opening adjustment with its own figures. The transition methods article covers the choices around the adoption date.

When does a rent accrual still belong on the balance sheet?

Three accruals survive, and none is a straight-line difference on a recognized operating lease.

Variable lease payments

ASC 842-10-30-6(a) keeps variable payments out of the lease payments unless they depend on an index or a rate. A pure percentage-rent or usage charge is therefore outside the lease liability. ASC 842-20-25-6(b) recognizes it "in the period in which the obligation for those payments is incurred."

A clause with a guaranteed minimum is different. Under ASC 842-10-30-5(a) an in-substance fixed floor is a lease payment and sits in the liability. KPMG's Question 6.6.70 treats a minimum annual guarantee that way.

Take retail percentage rent of 2% of annual sales above $5,000,000, billed the following February. Sales for the year are $6,000,000, so the amount owed is $1,000,000 times 2%, or $20,000. At December 31 the lessee debits variable lease cost and credits accrued liabilities for $20,000.

ASC 842-20-55-1 has the lessee recognize the cost, in interim periods too, before the target is reached when reaching it is probable. ASC 842-20-55-2 reverses that cost once it is probable the target will not be met.

Short-term leases

ASC 842-20-25-2 lets a lessee elect, by class of underlying asset, not to recognize short-term leases on the balance sheet. The Codification's glossary defines a short-term lease by two tests at commencement: a term of 12 months or less, and no purchase option the lessee is reasonably certain to exercise. Lease payments then go to profit or loss "on a straight-line basis over the lease term."

With no ROU asset to absorb the difference, accrued rent comes back as a plain liability. A 10-month equipment lease charges $2,000 a month for five months and $3,000 a month for the next five, $25,000 in total. Straight-line cost is $2,500 a month. After month 5 the lessee has expensed $12,500, paid $10,000 and carries $2,500 of accrued rent.

Rent due but unpaid at period end

A payment that has come due and not been paid is a payable, not a straight-line difference. KPMG's Handbook: Leases addresses it as an interpretive response rather than by pointing to a paragraph of Topic 842. It illustrates the case in Example 6.7.08, where a lessee short-pays two months of rent without the lessor's agreement.

In KPMG's illustration the straight-line cost does not change. The unpaid part of each contractual payment moves from the lease liability to accounts payable. KPMG adds that the lessee "may elect to present this amount in its current portion of operating lease liabilities." If the lessor later forgives the amount, the analysis in rent concession types and their ASC 842 treatment takes over.

What does the auditor ask for on accrued rent?

Expect five requests.

• The gap reconciliation. For each operating lease, liability less ROU asset agrees to cumulative straight-line cost less cumulative cash, after initial direct costs, incentives and impairment. That proves ASC 842-20-35-3(b) was applied.
• A scan of legacy accounts. Any accrued or deferred rent account with a balance is traced to a lease. If that lease is on the ASC 842 schedule, and the balance is not an in-period accrual reversed at the reporting date, it is counted twice.
• Variable rent support. The clause, the sales or usage report and the calculation. At interim dates, add the basis for calling the target probable, the test in ASC 842-20-55-1.
• The short-term lease election. The policy by asset class that ASC 842-20-25-2 allows, the lease term assessment and the straight-line calculation for uneven payments.
• Accounts payable against the liability roll-forward. An unpaid installment appears once: in payables or in the lease liability, not both and not neither.

For the wider context, see the plain-language overview of ASC 842 lease accounting and the complete ASC 842 guide.

Frequently asked questions

Is accrued rent still a liability under ASC 842?

Not for the straight-line difference on an operating lease. ASC 842-20-35-3(b) measures the right-of-use asset at the lease liability adjusted for prepaid or accrued lease payments, so that balance sits inside the asset. A separate accrual still appears for variable lease payments, for short-term leases under the ASC 842-20-25-2 election, and for rent that is due but unpaid.

What is the difference between accrued rent and prepaid rent?

Accrued rent is lease cost recognized before the cash is paid. Prepaid rent is cash paid before the cost is recognized. For an operating lease, ASC 842-20-35-3(b) adjusts the right-of-use asset for both: accrued rent holds the asset below the lease liability, and prepaid rent holds it above.

What happened to accrued rent when a private company adopted ASC 842?

ASC 842-10-65-1(m) measured the opening right-of-use asset of an operating lease at the lease liability adjusted for the items in ASC 842-20-35-3(b), which include accrued lease payments. The ASC 840 accrued rent balance was derecognized, and it reduced the opening right-of-use asset.

Sources and further reading

• ASC 842-20-25-6 and 842-20-25-8 — single straight-line lease cost, variable lease payments, and the remaining cost of the lease.
• ASC 842-20-35-3, 842-20-30-1 and 842-20-30-5 — subsequent and initial measurement of the operating lease liability and ROU asset.
• ASC 842-10-30-5, 842-10-30-6, 842-20-55-1 and 842-20-55-2 — fixed and in-substance fixed payments, variable payments outside the lease payments, and when their cost is recognized or reversed.
• ASC 842-20-25-2 — the short-term lease exemption.
• ASC 842-10-65-1 — effective date for entities that are not public business entities, and transition for operating leases.
• KPMG Handbook: Leases — paragraph 6.4.170 and Question 6.4.10 on the two methods, Question 6.6.70 on minimum guarantees, Example 6.7.08 on short payments, and transition Examples 13A.3.10 and 13A.3.40.
• PwC Leases guide, section 4.4, Subsequent recognition and measurement – lessee.

Explore how iLeasePro can streamline your lease portfolio management!

Tour of iLeasePro

Schedule a Demo

Check Out Knowledge Base

If this guide proved beneficial, please share it with fellow colleagues or bookmark it for future reference. Keep an eye out for more deep dives into the intricate world of lease accounting and corporate taxes and how the ASC 842 Lease Accounting Standard impacts them.