2.1 ASC 606 Revenue Recognition & ASC 842 Lease Accounting
Apply the 5-step revenue recognition model and differentiate operating vs finance lease accounting for lessees under ASC 842.
Key Blueprint Takeaways
- ASC 606 5-step model applies to all customer contracts; variable consideration is constrained.
- ASC 842 puts all leases > 12 months on the balance sheet as ROU Assets and Lease Liabilities.
- Finance leases front-load expense (amortization + interest); operating leases record straight-line expense.
FASB ASC 606 establishes a single, comprehensive principles-based framework for revenue recognition across all industries, centered on the transfer of control of promised goods or services.
Under ASC 842, operating leases and finance leases both require balance sheet recognition. Finance lease criteria examine ownership transfer, purchase options, economic life term (>= 75%), present value of payments (>= 90%), and asset specialization.
A corporation enters into a 5-year equipment lease with annual payments of $50,000 due at the end of each year. The equipment has an economic life of 6 years and fair value of $220,000. Title does not transfer at the end of the lease, there is no purchase option, and the equipment is not specialized. The present value of lease payments at the lessee's incremental borrowing rate is $190,000 (86% of fair value). How must the lessee classify this lease under ASC 842?