Those who have started to implement the new lease accounting standard have discovered that the time and resources required should not be underestimated. The standard, Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 842, Leases, was issued in February 2016. Much of the time required for its implementation is being spent gathering the relevant data needed to comply. The effective date of the standard is annual periods beginning after December 15, 2018 for public companies and annual periods beginning after December 15, 2019 for nonpublic companies.
Targeted Improvements to ASC 842, Leases
As a result of concerns over the cost and complexity of implementing the standard, the FASB recently released ASU No. 2018-11, which amends ASC Topic 842 in order to add an optional transition method that permits entities to apply the new requirements by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the year of adoption, and also provides a practical expedient for lessor separation of the lease and non-lease components of a contract.
Prior to ASU No. 2018-11, the leasing requirements had to be applied in the year of implementation using a modified retrospective transition method under which lessees were required to recognize lease assets and lease liabilities on the balance sheet for all leases and provide the new and enhanced disclosures for each comparative period presented. ASU No.2018-11 allows entities the option, in the year of implementation, to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. When this adoption is elected, reporting on comparative periods presented must continue to follow the guidance in existing U.S. Generally Accepted Accounting Principles (GAAP) in accordance with ASC 840, meaning that lease assets and lease liabilities are not recognized on the balance sheets of the comparative periods presented and the disclosure of future obligations under operating leases is required.
Key Changes to ASU 2018-11
Under ASC 842 lease components in a leasing contract are to be separated from non-lease components. ASU No. 2018-11 amends this guidance by:
- Providing for an optional practical expedient under which a lessor may elect an accounting policy, by class of underlying asset, to not separate non-lease components from lease components, but rather account for them as a single component, as long as certain conditions are met;
- Providing guidance concerning accounting treatment of a single combined component based on whether it is mainly a lease component or non-lease component;
- Requiring that consideration is given to whether the lessee would be expected to assign more value to the non-lease component than the lease component in determining whether a non-lease component is the main component
- Requiring disclosure of 1) the optional accounting policy being elected 2) the nature of the lease and non-lease components 3) the class or classes of underlying assets for which the practical expedient is being used 4) as applicable, identity of the non-lease components accounted for separately because they do not qualify for the practical expedient
Though there is much effort involved in implementing the new standard, the hope is that the recently issued amendment, ASU No. 2018-11, will help to ease the burden on time and resources.
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