Navigate lease accounting changes to boost agribusiness compliance and strategy

This article updated Jan. 30, 2025.

Since the Financial Accounting Standards Board (FASB) Accounting Standards Codification® (ASC) Topic 842, Leases, became effective for private companies for fiscal years beginning after Dec. 15, 2021, agribusiness entities have had complexities to navigate.

ASC 842 has significantly changed how agribusinesses account for leasing activities, bringing more transparency — and more complexity — to financial reporting. Companies must continue to evaluate their lease contracts and related accounting practices to improve compliance and financial strategies.

Overview of lessee accounting for leases under ASC 842

ASC 842 was designed to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.

The standard requires lessees to recognize nearly all leases, including both finance and operating leases, on the balance sheet. Lessees recognize a right-of-use (ROU) asset and a lease liability initially measured at the present value of lease payments.

For leases with a term of 12 months or less, lessees can elect not to recognize ROU assets and lease liabilities but must recognize lease expense on a straight-line basis over the lease term.

Observations in agribusiness post-ASC 842 implementation

The following observations outline the most notable impacts on agribusiness.

Variable consideration in leases

Agribusiness companies often engage in leases with variable payments, such as crop-share arrangements where payments to lessors are based on the output or price of the crop. Under ASC 842, variable lease payments that depend on an index or a rate initially measure the lease liability.

However, variable payments that aren’t tied to an index or rate are excluded from the lease liability measurement and are recognized in the period in which the obligation for those payments is incurred.

Leases involving land

Leases that include land continue to require careful analysis under ASC 842. If a lease includes both land and another asset, entities must assess whether the land element is significant relative to the total lease. If significant, the land and building elements should be accounted for separately, potentially affecting the lease classification and measurement.

Biological assets

ASC 842 doesn’t apply to leases of biological assets, such as living plants or animals. Agribusinesses must consider the implications for leases involving bearer plants. While the plants themselves are outside the scope of ASC 842, any non-plant components of the lease, such as land or equipment, must still be considered under the lease accounting standard.

Practical challenges and considerations

The following could arise as potential challenges.

Implementation complexity

Many agribusinesses initially underestimated the complexity of implementing ASC 842, particularly in identifying lease contracts across decentralized operations and calculating the lease liabilities and ROU assets due to variable considerations common in agricultural leases.

Systems and processes

Ongoing challenges include maintaining systems and processes that can handle the detailed lease data required for ASC 842 compliance, especially for companies with numerous and diverse leasing arrangements.

Education and training

Continuous education and training on the nuances of lease accounting under ASC 842 are crucial as personnel change and businesses evolve.