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ASC 842 Cash Flow Reporting

Understanding Your Cash Flows under the ASC 842 Standard.

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Cash Flow Reporting in the New Lease Accounting Landscape

The introduction of the ASC 842 lease accounting standard marked a significant shift in how entities recognize, measure, and report leases. This standard, which replaced the previous ASC 840 guidance, aims to increase transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet. A critical piece of this puzzle is the impact of ASC 842 on the statement of cash flows. Understanding the nuances of cash flow reporting under this new standard is essential for financial professionals and entities to ensure compliance and maintain accurate financial statements.

The Essence of the Statement of Cash Flows

The statement of cash flows serves as a bridge between the income statement and the balance sheet, providing a detailed account of an entity's cash inflows and outflows over a period. Its primary purpose is to give investors, creditors, and other stakeholders a clear view of the company's liquidity, solvency, and financial flexibility. By categorizing cash flows into operating, investing, and financing activities, the statement of cash flows helps users assess the entity's ability to generate future cash flows, meet its obligations, and fund its operations and growth.

Classifying Transactions under ASC 842

Under ASC 842, lease transactions can impact all three sections of the statement of cash flows: operating, investing, and financing. The classification of these transactions is crucial for accurate reporting and analysis.

Operating Activities

Operating activities generally include the principal cash effects of transactions and other events that enter into the determination of net income. Under ASC 842, payments made for short-term leases (those with a term of 12 months or less), variable lease payments, and payments for contracts with service components are classified within operating activities. This is consistent with the treatment of these payments under ASC 840. However, ASC 842 introduces a key change in the presentation of lease payments related to operating leases by requiring these payments to be separated into a single lease cost, calculated so that the remaining lease liability is amortized in a systematic and rational manner over the lease term.

Investing Activities

Investing activities generally include transactions involving the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Under ASC 842, payments made to obtain or terminate a lease are classified within investing activities. This treatment aligns with the handling of payments to acquire property, plant, and equipment.

Financing Activities

Financing activities include transactions and events that affect long-term liabilities and equity. Under ASC 842, principal payments of finance lease liabilities are classified within financing activities, similar to the repayment of principal on traditional debt financing. This represents a shift from ASC 840, where capital lease payments were split between interest (operating activities) and principal (financing activities).

Significant Differences Between ASC 840 and ASC 842

The transition from ASC 840 to ASC 842 introduces several significant changes to lease accounting, which in turn affect cash flow reporting:
  • Balance Sheet Recognition: ASC 842 requires lessees to recognize almost all leases on the balance sheet, including operating leases, which were previously off-balance sheet. This change increases transparency but does not directly impact the cash flow statement.
  • Lease Classification and Presentation: Under ASC 842, the distinction between operating and finance leases remains, but the criteria and accounting treatment have been updated, affecting how lease payments are reflected in the cash flow statement.
  • Expanded Disclosure Requirements: ASC 842 mandates enhanced qualitative and quantitative disclosures, including information about leasing activities that can indirectly impact cash flow management and reporting.
The introduction of ASC 842 represents a paradigm shift in lease accounting, with significant implications for the statement of cash flows. By understanding the nuances of cash flow classification under this new standard, entities can better prepare their financial statements, ensuring transparency and compliance. As organizations navigate this complex landscape, staying informed and agile will be key to mastering the reporting requirements of ASC 842.

Get the Best Lease Accounting Software Solution from iLeasePro

At iLeasePro, we understand every aspect of leasing, including lease accounting financial reporting. That means we know what lease features are involved, how calculations need to be performed and recorded, and how you can best use your leases and lease data as a business asset.

We also know the ASC 842 standard inside out, and as such we know how lease accounting software has to work to be compliant with that standard.

We’ve provided lease accounting software for small businesses, and for larger companies as well. Our lease accounting software pricing is among the best in the industry, and when you call us we can set you up with a lease accounting software free demo.

To do this, call us at 888-351-4606, or you can email us at We also have plenty of great information about lease accounting software on our website, which is, and you can chat with a live representative there as well.

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