Is Your Business Handling Lease Accounting Correctly?
A Guide for Maryland Business Owners
By Dan Wahlberg, CPA | May 2026
If your business leases office space, equipment, vehicles, or any other long-term asset, there’s a good chance your financial statements need to look different than they did a few years ago — and if you’re still doing it the old way, that’s a problem worth fixing.
ASC 842 is the lease accounting standard that changed how businesses are required to report leases on their financial statements. I’ve seen a lot of Maryland mid-market companies either unaware of the requirement, partially compliant, or unclear on what it means for their business. Here’s a plain-English breakdown.
What Changed and Why It Matters
Under the old rules, operating leases — think office space, copiers, company vehicles — were kept entirely off the balance sheet. You just recorded the monthly rent as an expense and moved on. ASC 842 changed that. Now businesses are required to recognize a “right-of-use” asset and a corresponding lease liability on the balance sheet for most leases with terms longer than 12 months.
In plain terms: if you sign a 3-year lease on office space or a piece of equipment, that future obligation now shows up on your balance sheet — both as an asset you have the right to use and as a liability you’re committed to paying.
Private companies have been required to comply with ASC 842 for a couple of years now. If you haven’t addressed this yet, you’re not alone — but you do need to get it sorted, especially if you’re seeking financing, going through an audit, or planning any kind of transaction.
Who This Affects Most
Almost every business with leases is affected, but some of Acclare’s client industries feel it more than others:
Car dealerships typically carry significant lease obligations — showroom facilities, service bays, loaner vehicles, and equipment. Getting these onto the balance sheet correctly is critical for lenders and floorplan financing arrangements that scrutinize your financials closely.
Construction and real estate companies often lease heavy equipment, trailers, and project office space. Multiple short-duration leases can complicate the analysis, and misclassifying a lease as short-term when it isn’t can create compliance issues.
Professional services firms with office leases need to make sure their facility commitments are properly captured, particularly if they have renewal options that extend the effective lease term under the new standard.
Manufacturing businesses with equipment leases need to determine whether those leases are operating or finance leases — a distinction that affects how costs flow through the income statement and what shows up on the balance sheet.
The Three Things That Trip Businesses Up
- Missing leases embedded in other contracts. ASC 842 applies not just to traditional lease agreements but to any contract that gives your business the right to control a specific asset for a period of time. That can include service contracts, outsourcing arrangements, or vendor agreements that include dedicated equipment. Many businesses don’t realize these qualify as leases under the standard.
- Getting the lease term wrong. Under ASC 842, if it’s reasonably certain that your business will exercise a renewal option, that renewal period gets added to the lease term for accounting purposes. A 2-year lease with a likely 2-year renewal might actually be a 4-year lease on your books. Underestimating this inflates your reported equity and understates your liabilities.
- Using the wrong discount rate. The liability recorded on your balance sheet needs to be discounted to present value. Private companies can use a practical expedient and apply a risk-free rate, but that choice has tradeoffs. Using the wrong rate — or not making a deliberate choice at all — produces incorrect numbers from the start.
What You Should Do
If your business hasn’t fully implemented ASC 842, or if you implemented it but aren’t confident the numbers are right, here’s where to start:
- Inventory all your leases. Pull together every lease agreement your business has — real estate, vehicles, equipment, technology. Don’t forget multi-year service contracts that might contain embedded leases.
- Determine which ones qualify. Leases under 12 months can generally be excluded. Everything else needs to be evaluated.
- Work with your CPA to get the numbers right. The balance sheet impact, income statement treatment, and disclosure requirements all need to be correctly handled. If you’re presenting financials to a bank or going through any kind of due diligence, errors here will be caught — and they create questions about the reliability of your financials overall.
The Bottom Line
ASC 842 isn’t new, but its impact on mid-market companies is still being felt. Getting it right matters for your financial credibility, your banking relationships, and your ability to make clear-eyed decisions about the commitments your business is carrying.
If you’re not sure whether your lease accounting is current and correct, that’s a conversation worth having sooner rather than later.