ASC 842 Lease Accounting Example: End-to-End Walkthrough with CAM

The Lease Setup

Tenant: Regional accounting firm Property: 4,200 SF office suite, Class B suburban office park Lease start: January 1, 2026 Term: 60 months (January 1, 2026 – December 31, 2030) Base rent: $18/SF Year 1, escalating 3% annually CAM: Estimated at $4.50/SF, billed monthly, reconciled annually Lease incentive: $35,000 tenant improvement allowance already received IBR: 6.5% per annum (based on company's current 5-year borrowing rate) Practical expedients elected: Short-term lease exemption (for month-to-month storage unit); no lease/non-lease component combination for this lease

Step 1: Classify the Lease

Apply the five ASC 842 criteria:

1. Transfer of ownership — No
2. Purchase option — No option in lease
3. Lease term vs economic life — 5 years vs 30+ year building; clearly not ≥75%
4. PV of payments vs fair value — PV will be well under 90% of building fair value
5. Specialized nature — Standard office space; no specialized buildout

Result: Operating lease. See operating lease vs finance lease for the full classification analysis.

Step 2: Calculate the Payment Stream (Fixed Rent Only)

CAM is variable and excluded.

Annual base rent:

• 4,200 SF × $18.00/SF = $75,600/year = $6,300/month (Year 1)
• Year 2: $6,300 × 1.03 = $6,489/month → $77,868/year
• Year 3: $6,489 × 1.03 = $6,684/month → $80,204/year
• Year 4: $6,684 × 1.03 = $6,884/month → $82,610/year
• Year 5: $6,884 × 1.03 = $7,091/month → $85,089/year

Total fixed payments over term: $75,600 + $77,868 + $80,204 + $82,610 + $85,089 = $401,371

Step 3: Calculate the Lease Liability (PV of Fixed Payments)

Monthly discount rate = 6.5% / 12 = 0.5417%

Calculate the PV of each year's monthly payments, discounted from the midpoint of the year (simplified) or month by month (exact). Using monthly cash flows:

Months 1–12: $6,300/month Months 13–24: $6,489/month Months 25–36: $6,684/month Months 37–48: $6,884/month Months 49–60: $7,091/month

PV of all payments at 6.5% IBR = $344,847

(This is calculated using standard NPV of uneven cash flows — use the Excel NPV function or a lease accounting tool to get the exact figure.)

Step 4: Calculate the ROU Asset

Lease Liability:                $344,847
+ Initial Direct Costs:               $0   (no broker commission paid by tenant)
+ Prepaid Lease Payments:             $0   (no first month paid before commencement)
− Lease Incentives Received:    $35,000   (TIA already received)
= ROU Asset:                    $309,847

Step 5: Commencement Journal Entry (January 1, 2026)

The TIA of $35,000 was received in cash before lease commencement. That receipt was recorded as cash in, with a corresponding deferred lease incentive or contra entry when received. At commencement, the ROU asset is measured net of the incentive already received ($344,847 − $35,000 = $309,847):

DR  Right-of-Use Asset (Operating)    $309,847
  CR  Lease Liability                              $344,847
[ROU asset is already net of the $35,000 TIA received]

If the TIA has not yet been received at commencement (e.g., landlord pays after move-in), record a receivable:

DR  Right-of-Use Asset (Operating)    $309,847
DR  Lease Incentive Receivable          $35,000   [TIA not yet received]
  CR  Lease Liability                              $344,847

Balance sheet after commencement:

The current/non-current split uses the next 12 months of principal reduction.

Step 6: Monthly Journal Entries — January 2026 (Month 1)

Total straight-line cost per month: $401,371 ÷ 60 months = $6,689

Entry 1 — Interest accrual on lease liability:

DR  Operating Lease Cost    $1,868
  CR  Lease Liability                    $1,868

[$344,847 × 0.5417% = $1,868]

Entry 2 — ROU asset amortization (plug):

DR  Operating Lease Cost    $4,821
  CR  Right-of-Use Asset                $4,821

[Plug = $6,689 straight-line cost − $1,868 interest = $4,821]

Entry 3 — Cash payment (actual Month 1 rent):

DR  Lease Liability          $6,300
  CR  Cash                               $6,300

Month 1 lease liability movement:

• Opening: $344,847
• • Interest accrual: $1,868
• − Cash payment: $6,300
• = Closing: $340,415

Income statement — Month 1: Total Operating Lease Cost = $1,868 + $4,821 = $6,689 (straight-line ✓)

CAM payment — Month 1 (variable, not in the above):

4,200 SF × $4.50/SF / 12 months = $1,575/month

DR  Variable Lease Cost / CAM Expense    $1,575
  CR  Cash                                          $1,575

Total cash out in January: $6,300 (rent) + $1,575 (CAM) = $7,875

Step 7: Lease Amortization Schedule (First 6 Months)

Note: The ROU asset amortization accelerates each month (from $4,821 to $4,943 in just 6 months) even though the lease cost stays flat. By Month 60, the ROU asset amortization will be roughly $6,050 and the interest will be only ~$38.

Step 8: Year-End CAM True-Up (December 31, 2026 / Q1 2027)

CAM payments made in 2026: $1,575 × 12 = $18,900

December 31, 2026 — Accrue estimated true-up:

Based on the landlord's Q3 operating expense report and your analysis of the CAM reconciliation, you estimate the true-up will be approximately $2,200.

DR  Variable Lease Cost / CAM Expense    $2,200
  CR  CAM Accrual (Accrued Liabilities)             $2,200

February 15, 2027 — Landlord's reconciliation statement arrives:

Actual CAM = $21,600 for the 4,200 SF space You paid: $18,900 True-up owed: $2,700

Your accrual was $2,200, so you underaccrued by $500.

[Reverse December accrual:]
DR  CAM Accrual                          $2,200
  CR  Variable Lease Cost                            $2,200

[Book final true-up per reconciliation statement:]
DR  Variable Lease Cost / CAM Expense    $2,700
  CR  Accounts Payable                              $2,700

Net income statement impact in Q1 2027: +$500 incremental CAM expense (the variance between accrual and actual).

Actual CAM rate check: $21,600 / 4,200 SF = $5.14/SF vs landlord's estimate of $4.50/SF. This 14% overage warrants review — see pro-rata share calculation and controllable vs non-controllable expenses to identify which line items drove the overage.

Step 9: Year-End Balance Sheet (December 31, 2026)

After 12 months of entries:

Lease Liability — December 31, 2026: Opening: $344,847

• 12 months interest accruals (approx.): $20,850 − 12 monthly payments: $75,600 = $290,097

ROU Asset — December 31, 2026: Opening: $309,847 − 12 months amortization (12 × avg ~$4,870): $58,440 = $251,407

Balance sheet presentation:

2026 Income Statement — Lease-Related Costs:

Step 10: ASC 842 Disclosure Footnote (Excerpt)

For the year ended December 31, 2026:

The Company recognized operating lease costs of $80,268 for fixed base rent and $21,100 for variable lease payments (CAM charges and estimated true-ups). Cash paid for operating leases in operating activities was $94,500 ($75,600 base rent + $18,900 CAM estimates). The weighted-average remaining lease term is 4.0 years. The weighted-average discount rate is 6.5%.

Maturity of operating lease liabilities as of December 31, 2026:

CAM Review Workflow After the True-Up

The $5.14/SF actual vs $4.50/SF budgeted gap in this example is meaningful. Before paying the $2,700 true-up, the controller should request the landlord's backup and check:

1. Is the pro-rata share calculation correct? (4,200 SF / total leasable area)
2. Were any non-controllable expense caps applied?
3. Were capital items excluded from the CAM pool per the lease?
4. Were management fees within the contractual limit?
5. Does the gross-up calculation reflect the right occupancy rate?

CapVeri's reconciliation workflow imports the landlord's CSV directly from Yardi or MRI, maps each GL line to the lease's exclusion list, and outputs a variance report. Use the CAM reconciliation template to run this analysis before the payment deadline.

Related Resources

• Operating Lease Accounting Entries — full entry templates for every scenario
• ASC 842 Lease Accounting Guide — comprehensive implementation guide
• Operating Lease vs Finance Lease — classification criteria
• US GAAP Lease Accounting Guide — GAAP vs IFRS comparison
• CAM True-Up — year-end reconciliation accounting
• CAM Gross-Up Calculator — verify the landlord's calculation
• Lease Accounting Standards ASC 842 — how ASC 842 changed CAM treatment