As nonprofits continue to adjust operations in response to changing needs, many are re-evaluating their physical office footprint. Some organizations are reducing space to lower costs, others are renewing leases to secure stability, and some are restructuring space to support hybrid work. While these changes may appear operational, they can have meaningful accounting implications under ASC 842.
Even small adjustments, such as extending the lease term, renegotiating rent, or modifying space usage, may require nonprofits to remeasure both the right-of-use (ROU) asset and the lease liability. Without timely review, these changes can result in misstated balances and last-minute adjustments during the audit.
How ASC 842 Views Lease Modifications
Under ASC 842, a lease modification occurs when the terms of the lease are changed and approved by both the nonprofit and the landlord. The accounting outcome depends on the nature of the change.
- If the modification adds new leased space at market rates, the update may be treated as a new, separate lease.
- If the modification does not add additional space but instead adjusts remaining rights and obligations, such as extending the term or changing the rent structure, the nonprofit must generally remeasure the existing lease using updated assumptions.
Reassessing Key Assumptions
Lease accounting relies on management’s assumptions about renewal, termination, and continued use of space. When operations evolve, assumptions must be revisited to ensure financial statements reflect current reality.
Key considerations include:
- Lease Term: Is the organization still reasonably certain to renew or terminate early?
- Discount Rate: Do changes in key assumptions require an update to the discount rate?
- Space Utilization: Is the organization subleasing unused space below market value, indicating a potential impairment loss?
Timely Review Helps Prevent Audit Surprises
One of the most common challenges we observe is that lease changes are not communicated to the finance team until year-end. By that point, remeasurement may be rushed, and journal entries may need to be recorded during the audit.
A recommended best practice:
- Ensure finance reviews lease amendments before terms are finalized.
Documentation Is Critical
To support transparency and audit readiness, organizations should maintain documentation that includes:
- The nature and purpose of the lease modification
- How ASC 842 guidance was applied
- Key assumptions used in determining revised terms
- The discount rate used and justification
- Remeasurement support schedules
Next Steps for Leaders
Nonprofits should:
- Engage finance teams early in lease discussions
- Revisit renewal and termination assumptions regularly
- Maintain well-organized lease documentation and calculations
Han Group can help assess lease modifications and ensure compliance with ASC 842.
