Lease Accounting for Nonprofits: A Practical Decision Tree for ASC 842

Lease accounting has always been part of nonprofit finance—but Accounting Standards Codification Topic 842 – Leases (ASC 842) changed the way it shows up. 

Issued by the Financial Accounting Standards Board (FASB), ASC 842 defines how organizations recognize, measure, present, and disclose leases in their financial statements. In practice, most of us shorten that to “ASC 842” and move on—but understanding what’s behind the name helps frame why leases now carry more weight in audits, board discussions, and financial reporting. 

For many nonprofits, ASC 842 didn’t introduce new leases—it changed how existing agreements are evaluated and documented. Office space, program facilities, equipment, and long-standing contracts that once lived in the background now require clearer judgment calls and stronger support. 

That’s where things can start to feel complicated. Not because the standard is unmanageable, but because it asks better questions up front: Is this a lease? Does an exception apply? How long is the lease term, really? 

Once you understand the decision-making framework behind ASC 842, the guidance becomes far more intuitive—and far easier to navigate during an audit. 

Let’s walk through a nonprofits practical decision tree for ASC 842 lease agreements.

Step 1: Does the Agreement Contain a Lease? 

Everything under ASC 842 starts with one foundational question: Does this agreement contain a lease? 

An arrangement contains a lease when two conditions are met: 

• There is an identified asset (either explicitly stated or implicitly specified), and 

• The organization has the right to control the use of that asset for a period of time 

Control means the organization: 

• Receives substantially all of the economic benefits from using the asset, and 

• Directs how and for what purpose the asset is used 

If either of those elements is missing, ASC 842 does not apply—and that’s an important conclusion to document. 

BryMar Audit Callout: Service contracts often deserve a second look. Copier agreements, technology infrastructure, and equipment arrangements sometimes include embedded leases. The key question is always: who controls the asset—the nonprofit or the vendor? 

If the answer is yes, keep moving through the decision tree. I

f the answer is no, you stop here. 

Step 2: Does an Exception Apply? 

Once an agreement qualifies as a lease, the next question is whether it qualifies for a practical exception. 

Short-Term Lease Exception 

If a lease: 

• Has a term of 12 months or less, and 

• Does not include a purchase option the organization is reasonably certain to exercise 

The nonprofit may elect to: 

• Expense lease payments as they are incurred, and 

• Avoid recognizing a right-of-use asset and lease liability 

• Avoid ASC 842 specific disclosure requirements in the financial statements 

This election can significantly simplify accounting—but it must be applied consistently to similar leases. This means Organizations may not pick and choose which leases are treated under ASC 842 for convenience or favorable presentation. 

BryMar Audit Callout: Inconsistency is one of the most common ASC 842 issues we see. The exception itself isn’t the problem—uneven application across leases is. A clearly documented policy goes a long way during audit review. 

Step 3: Determining the Lease Term 

This is where professional judgment really comes into play. 

The lease term includes: 

• The non-cancelable period, plus 

• Renewal options the organization is reasonably certain to exercise 

Factors that often influence this assessment include: 

• Whether the location is mission-critical 

• Significant leasehold improvements 

• The cost, disruption, or feasibility of relocating programs 

Real-World Nonprofit Perspective 

A lease may be technically cancelable on paper, but operationally impractical to exit. Community clinics, education centers, and program facilities often fall into this category—and ASC 842 allows that reality to be reflected, as long as the rationale is documented. 

BryMar Audit Callout: Auditors frequently focus here. Clear documentation of assumptions and conclusions on the Organization’s intent to cancel or renew a lease helps prevent follow-up questions late in the audit process. 

Step 4: Lease Classification 

Nonprofits classify leases as either: 

• Operating leases, or 

• Finance leases 

A lease is generally a finance lease if it meets any of the following criteria: 

• Ownership transfers at the end of the lease 

• A purchase option is reasonably certain to be exercised 

• The lease term covers a major portion (typically 75%) of the asset’s remaining economic life 

• The present value of lease payments represents substantially all (typically 90%) of the asset’s fair value 

• The asset is specialized and has no alternative use 

If none of these criteria are met, the lease is typically classified as an operating lease. 

While classification affects income statement presentation, both types of leases are recognized on the statement of financial position under ASC 842. 

Step 5: Measuring and Recording the Lease 

At lease commencement, nonprofits record: 

• A lease liability, measured as the present value of future lease payments, and 

• A right-of-use asset, generally based on the lease liability with certain adjustments 

After that: 

• Operating leases result in a single lease expense recognized over time 

• Finance leases result in separate interest and amortization expense 

BryMar Audit Callout: Most ASC 842 audit findings are not driven by calculation errors. They stem from missing leases, undocumented assumptions, or incomplete decision-making support. 

Measuring the Lease Liability: Present Value and Discount Rate 

The lease liability equals the present value of lease payments over the lease term, discounted using an appropriate rate.

ASC 842 provides the following options, in order of preference: 

Rate implicit in the lease 

• Used if it is readily determinable 

• Often unavailable to lessees, especially nonprofits, because it requires knowledge of the lessor’s assumptions 

Incremental borrowing rate (IBR) 

• The rate the organization would pay to borrow funds, on a collateralized basis, over a similar term 

• Requires judgment, documentation, and often external data or modeling 

Risk-free interest rate (practical expedient) 

• A permitted election for nonpublic entities, including most nonprofits 

Nonprofits may elect, as an accounting policy by asset class, to use the risk-free rate (typically a U.S. Treasury rate).

This election simplifies implementation and audit support but generally results in higher recorded lease liabilities and Right-of-Use (ROU) assets. 

Why the ROU Asset May Not Equal the Lease Liability 

Although the ROU asset is commonly described as “based on” the lease liability, the two amounts are not always equal.

ASC 842 requires several adjustments at lease commencement that can create differences, including: 

• Prepaid lease payments 

  • Increase the ROU asset relative to the lease liability 
    

• Accrued lease payments  

  • Reduce the ROU asset 
    

• Initial direct costs 

  • Added to the ROU asset (but not the lease liability) 

  • Examples include certain legal fees or broker commissions directly attributable to executing the lease 
    

• Lease incentives received from the lessor 

  • Reduce the ROU asset 
    

• Impairment considerations 

  • If the ROU asset is impaired at or after commencement, it may be written down independently of the lease liability 

As a result, differences between the ROU asset and lease liability are not errors by default—but they should be clearly understood, calculated, and documented. 

Why This Matters Beyond Compliance 

ASC 842 impacts more than financial statements. It can affect: 

• Key balance sheet metrics 

• Debt covenant calculations 

• Board reporting 

• Audit timelines and planning 

When leases are identified early, evaluated consistently, and supported with clear documentation, audits run smoother—and leadership gains confidence in the numbers they rely on. 

A Partnership Approach to ASC 842 

At BryMar, we see ASC 842 as more than a compliance exercise. It’s an opportunity to strengthen financial clarity, improve audit readiness, and build trust in reporting—without losing sight of your mission. 

We partner with nonprofits to help them apply ASC 842 thoughtfully, document judgment areas clearly, and feel confident walking into audit season. 

If you’re navigating lease accounting questions or preparing for your next audit, we’re here to help—every step of the way. 

👉 Let’s talk about how BryMar can support your nonprofit with clarity, consistency, and audits that truly add value.