By Courtney K. Corallo, Business Assurance & Advisory Services Manager
Update: On Tuesday, April 21, 2020, the Financial Accounting Standards Board (“FASB”) issued an exposure draft of a proposed Accounting Standards Update that would grant a one-year effective delay for certain entities implementing the new lease and revenue recognition standards.
What are the Financial Statement Presentation and Disclosure Requirements of the Lessee Under ASC 842?
ASC 842, the new lease accounting standard, is effective for public companies for annual periods beginning after December 15, 2018 and for nonpublic companies for annual periods beginning after December 15, 2019. In order to ensure that all requirements have been met, entities should allow plenty of time to gather the relevant data needed to comply. Implementation of ASC 842 involves several steps and can be a timely and costly process. One of the final steps in the process is to determine the necessary financial statement presentation and disclosure requirements.
General Financial Statement Presentation Requirements
A lessee should present, either on the balance sheet or in the notes to the financial statements, all of the following:
- Finance and operating lease right-of-use assets, separately from each other and from other assets
- Finance and operating lease liabilities, separate from each other and from other liabilities
On the income statement
- For finance leases, the interest expense on the lease liability and amortization of the right-of-use asset are not required to be presented separately and should be presented consistent with how the entity presents interest expense, depreciation, or amortization of similar assets.
- For operating leases, lease expense should be included in the lessee’s income from continuing operations.
On the statement of cash flows of lessees
Cash flows related to leases should be presented under the following classifications:
- Repayments of the principal portion of the lease liability arising from finance leases
- Variable lease payments and short-term lease payments not included in the lease liability
- Payments arising from operating leases
- Interest on the lease liability arising from finance leases
- Costs to bring another asset to the condition and location necessary for its intended use
Additional Disclosure Requirements
The disclosure requirements under ASC 842 are considerably more comprehensive than those in ASC 840, the old lease accounting standard. According to the new standard, the objective of the disclosure requirements of ASC 842 is to “enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases”. In order to achieve that objective, a lessee must disclose qualitative and quantitative information surrounding all of the following:
Its leases, including any leases that have not yet commenced.
Information about the nature of an entity’s leases includes:
- A general description
- The basis and terms on which variable lease payments are determined
- Information surrounding any options to extend or terminate leases
- Information surrounding any residual value guarantees
- Any restrictions or covenants imposed by leases
Information about significant assumptions and judgments made in applying the standard’s requirements to those leases.
This includes all of the following:
- The determination of whether a contract contains a lease
- The allocation of the consideration in a contract between lease and non-lease components
- The determination of the discount rate for the lease
The amounts recognized in the financial statements relating to those leases, including the following:
- Finance lease cost
- Operating lease cost
- Short-term lease cost
- Variable lease cost
- Sublease income, disclosed on a gross basis
- Net gain or loss recognized from sale and leaseback transactions
- Amounts segregated between finance and operating leases
Further, a lessee shall disclosure a maturity analysis of its finance and operating lease liabilities separately, showing undiscounted cash flows for a minimum of five years. All related party lease transactions must be disclosed. If a lessee elects the practical expedient of not separating lease components from non-lease components, this must be disclosed, along with which class or classes of assets it has elected to apply the practical expedient.
Throughout the disclosures, a lessee shall aggregate or disaggregate disclosures in order to simplify the information for users of the financial statements. Some examples of ways that a lessee may choose to disaggregate its lessee disclosures are by class or type of the underlying asset, by business segment, or by lease term.
While financial statement presentation and disclosure may be one of the final steps in ASC 842 implementation, these factors should be considered throughout the entire process in order to avoid any last-minute surprises.
Additional Resources on ASC 842:
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.