Understanding ASC 842 and month-to-month leases

ASC 842 is the lease accounting standard that requires organizations to bring almost all leases onto the balance sheet. Before ASC 842, under ASC 840, many operating leases were kept off the balance sheet, which meant financial statements didn’t fully reflect a company’s obligations. The change was designed to improve transparency and comparability.

ASC 842 applies to different types of leases: long-term, short-term, and flexible arrangements like month-to-month leases under ASC 842. On paper, a month-to-month lease looks simple. It lasts one month at a time, and either side can cancel with notice. But when you apply ASC 842, the accounting treatment becomes more complex.

Why month-to-month leases matter

Month-to-month leases are common across industries:

• Real estate: Many companies remain in their offices or retail locations on a rolling basis after the fixed term ends.

• Equipment: Businesses often rent vehicles, computers, or heavy machinery month-to-month to meet short-term needs.

• Seasonal needs: Temporary warehouse or storage rentals often start as month-to-month agreements.

Although these contracts look temporary, they often continue for long periods. Under ASC 842, accountants must look at the economic reality rather than just the legal wording.

How renewals affect classification

The renewal options and management’s intent are critical in deciding how to classify ASC 842 month-to-month leases.

• If a company is reasonably certain to keep renewing the lease, the arrangement may not qualify as short-term.

• If the arrangement is genuinely temporary and will end within a few months, it may remain exempt.

Visual Lease, a competitor, explains: “A reporting entity should consider the application of lease accounting in ASC…” This points out the need to carefully evaluate month-to-month contracts, not assume they’re exempt.

Example scenario

A startup rents office space on a month-to-month contract after its initial term. Management expects to stay in the same location for the next two years. Even though the contract renews every month, under ASC 842 the economic expectation means the lease should be capitalized.

This example shows why careful classification is essential. Misclassification leads to errors in financial reporting, audit adjustments, and compliance risks.

Short-term lease exemption under ASC 842

The ASC 842 short-term lease exemption was introduced to reduce the burden of accounting for very short leases. Without it, every lease, even for a one-month copier rental, would require balance sheet recognition.

What qualifies as a short-term lease?

For a lease to qualify as a short-term lease ASC 842:

1. The lease must have a non-cancellable period of 12 months or less.

2. There must be no purchase option expected to be exercised.

3. The company must apply the exemption consistently across similar classes of assets.

Companies don’t have to record lease liabilities or right-of-use assets if the criteria are met. Instead, they recognize lease expense on a straight-line basis.

Why month-to-month leases are confusing

At first glance, a month-to-month lease ASC 842 seems to meet the exemption. The contract is short, cancellable, and flexible. But ASC 842 asks companies to consider the likelihood of continuation.

If the lease is expected to last beyond 12 months due to continuous renewals, it doesn’t qualify. The intention and use matter as much as the written terms.

Examples

• Qualifies: A retailer rents a small storage unit for four months during holiday season. The lease ends after demand decreases.

• Doesn’t qualify: A manufacturer rents a facility on a month-to-month basis and has been in the same building for years.

Risks of misclassification

• Understated obligations: If recurring leases are kept off the balance sheet, liabilities are hidden.

• Audit findings: Auditors can require costly restatements.

• Loss of trust: Inconsistent reporting undermines investor confidence.

Best practices

• Reassess month-to-month leases regularly.

• Document management’s intent around renewals.

• Track renewal patterns to see if they extend beyond 12 months.

• Use software to apply rules consistently and avoid human error.

Competitors frame this issue as “exceptions to applying lease accounting,” but the reality is more nuanced. Month-to-month leases require ongoing assessment.

How SOFT4Lessee supports ASC 842 month-to-month lease accounting

Managing month-to-month leases under ASC 842 manually is difficult. Contracts renew automatically, terms may change, and exemptions can expire without notice. SOFT4Lessee helps companies handle these challenges with automation and structure.

Automated lease classification

SOFT4Lessee evaluates each lease against ASC 842 rules. It checks whether the lease qualifies as a short-term exemption or must be capitalized. This reduces the risk of human judgment errors and ensures policies are applied consistently.

Tracking renewals and modifications

Month-to-month leases often change without clear documentation. SOFT4Lessee tracks every renewal, modification, or termination, and creates alerts when a lease may cross into long-term classification.

Automated calculations

Calculating right-of-use assets and lease liabilities is time-consuming and prone to mistakes in spreadsheets. SOFT4Lessee automates these calculations and updates them when lease terms change.

ERP integration

SOFT4Lessee integrates with major ERP systems like Microsoft Dynamics 365, SAP, Oracle NetSuite, Sage, Xero, and others. This means lease data flows directly into financial reporting systems, reducing duplication and improving accuracy.

Audit trail and documentation

Auditors want to see how classification decisions were made. SOFT4Lessee maintains a detailed audit trail, showing when leases were exempt, when they were capitalized, and why decisions were taken.

Example

A logistics company rents vehicles on a month-to-month basis. Initially, they treat them as short-term leases. After 15 months of renewals, SOFT4Lessee automatically flags the contracts, reclassifies them, and updates reports. Instead of facing an audit adjustment, the company stays compliant.

SOFT4Lessee demonstrates its usability through product demos: “Access our quick product overview videos. See it in Action.” This reflects their practical, hands-on approach to compliance.

Reporting and disclosure requirements for month-to-month leases

ASC 842 places heavy emphasis on disclosure. Even if a lease qualifies for the short-term exemption, companies must still provide clear information in the notes to their financial statements.

Standard disclosures for capitalized leases

For leases recorded on the balance sheet, disclosures must include:

• Lease liability balances.

• Right-of-use asset balances.

• A maturity analysis of lease payments.

• Weighted average lease term and discount rate.

Disclosures for short-term leases

For leases using the exemption, companies must disclose:

• Short-term lease expense for the period.

• The accounting policy used for short-term leases.

This ensures that stakeholders still see the scale of leasing activity, even if it doesn’t appear on the balance sheet.

The challenge with month-to-month leases

• Changing classifications: Leases may shift from exempt to capitalized if they continue beyond 12 months.

• Inconsistent reporting: Manual tracking may miss when a lease no longer qualifies.

• Audit scrutiny: Auditors are cautious about recurring “short-term” leases that look long-term.

Example scenario

A software company discloses $400,000 in short-term lease expense for office space. However, auditors discover the same space has been rented continuously for three years. The lease is reclassified, requiring a restatement.

How SOFT4Lessee helps

SOFT4Lessee automates disclosure reporting. It generates the required lease liability, ROU asset, and maturity analysis reports, and includes short-term lease expenses where applicable. Competitors like Visual Lease also offer disclosure tools, but SOFT4Lessee’s advantage is the way it links classification, calculations, and reporting into one seamless process.

Best practices for managing ASC 842 month-to-month leases

Managing month-to-month leases ASC 842 effectively requires a structured approach. Flexible contracts can create compliance headaches if not tracked carefully.

1. Centralize lease data

Keeping contracts in emails or spreadsheets increases the chance of oversight. A centralized database ensures every lease is captured and tracked.

2. Monitor renewals closely

Month-to-month leases can quietly extend into years. Systems should track when renewals occur and alert finance teams to potential reclassification.

3. Document assumptions and intent

If management expects a lease to end within six months, document the reasoning. This protects against audit challenges.

4. Automate reporting

Automation reduces the burden of manual reporting and ensures disclosure consistency. Software like SOFT4Lessee can generate reports with minimal effort.

5. Train staff regularly

Accounting teams need to understand the nuances of ASC 842 short-term lease exemptions. Regular training helps prevent mistakes in classification and reporting.

Example: avoiding compliance risk

A manufacturer rented extra warehouse space on a month-to-month basis. The contract was assumed exempt but continued for over three years. During an audit, it was flagged and required reclassification. After adopting SOFT4Lessee, the company used automated alerts and central tracking to avoid repeat mistakes.

Competitor comparison

Other platforms recommend “ongoing monitoring.” SOFT4Lessee goes further by offering training programs and a knowledge center. This combination of automation and education ensures compliance is maintained long-term.

Flexible deployment and pricing options

SOFT4Lessee offers flexible deployment models:

• Cloud-based: Ideal for quick setup, updates, and accessibility across locations.

• On-premises: Suitable for organizations with strict IT policies or specific compliance needs.

Pricing is transparent, with licensing models and Excel calculators that help organizations understand costs upfront. This allows businesses of all sizes to find a solution that fits their budgets and IT requirements.

Training, support, and onboarding resources

Successful adoption depends on support. SOFT4 provides:

• A knowledge center with learning materials.

• Training programs to help teams understand ASC 842 requirements.

• Onboarding assistance to ensure smooth implementation.

• Ongoing support for troubleshooting and regulatory updates.

This reduces the risk of compliance errors and boosts confidence in using the system. With regulations as detailed as ASC 842, expert guidance is essential.

Challenges companies face with ASC 842 month-to-month leases

Even with tools like SOFT4Lessee available, many organizations still struggle with the complexities of ASC 842 month-to-month leases. These challenges often come down to process gaps and human oversight.

1. Inconsistent lease documentation

Month-to-month contracts are often less formal than long-term agreements. Missing renewal notices or unclear termination clauses can lead to disputes about classification.

2. Reliance on manual tracking

Spreadsheets work for small portfolios but quickly break down as the number of contracts grows. One missed renewal can change whether a lease is exempt or capitalized.

3. Misunderstanding renewal intent

Some companies assume that because the contract is cancellable, it is short-term. But the standard requires evaluating whether renewals are reasonably certain.

4. Communication gaps between departments

Operations may renew or modify leases without telling finance. This creates classification errors that show up only at audit time.

5. Audit pressure

Auditors focus heavily on rolling contracts. If a “short-term” lease continues for years, auditors may insist it be capitalized.

Companies can improve compliance and reduce risks by addressing these challenges with better documentation, communication, and automation.

Future outlook for lease accounting standards

ASC 842 is not the final word on lease accounting. Standards evolve as regulators and businesses identify new issues. Companies managing month-to-month leases ASC 842 should prepare for changes ahead.

Possible areas of change

1. Clearer guidance on renewals – Renewal intent for rolling contracts is a gray area. Future updates may set stricter rules.

2. Global alignment with IFRS 16 – U.S. GAAP and IFRS have differences. Greater alignment could be on the horizon.

3. Technology-driven compliance – Regulators may emphasize system-based compliance, reducing reliance on manual processes.

4. Expanded disclosures – Stakeholders want more transparency, which may mean stricter disclosure requirements for month-to-month leases.

How to prepare

• Use flexible software like SOFT4Lessee that can adapt to new standards.

• Provide ongoing staff training to stay ahead of changes.

• Document decision-making thoroughly, as evidence is key in audits.

Taking control of ASC 842 month-to-month leases

Month-to-month leases under ASC 842 represent a small contract type with big compliance implications. What looks like a simple 30-day agreement can turn into a long-term obligation in the eyes of accounting standards.

The short-term lease exemption ASC 842 provides relief, but it only applies if leases genuinely remain under 12 months without reasonably certain renewals. Misclassification, whether intentional or accidental, can lead to audit findings, financial restatements, and reputational risk.

To manage these risks, organizations need to:

• Centralize lease management to ensure no contracts are missed.

• Track renewals closely so exemptions don’t silently expire.

• Automate reporting and disclosure to reduce errors and meet audit demands.

• Train staff and improve communication so all departments understand their role in lease compliance.

SOFT4Lessee offers practical solutions to these challenges. With automated classification, renewal tracking, ERP integration, and detailed audit trails, companies can confidently manage ASC 842 month-to-month leases without getting lost in spreadsheets or guesswork.

Looking ahead, compliance will only get more complex. Standards may evolve, disclosure requirements may expand, and auditors will continue to scrutinize rolling contracts. By investing in strong processes and reliable tools now, organizations can protect themselves from compliance risks and focus on growth.

In short: month-to-month leases might look small, but under ASC 842, they deserve big attention. Companies that take a proactive approach will find compliance manageable and sustainable, while those that ignore the details risk costly consequences.