Transition Relief for Entities Adopting ASC 842
Transition Relief for Entities Adopting ASC 842

Transition Relief for Entities Adopting ASC 842

The new leasing standard (ASC 842) was issued by the FASB in February 2016 and now that we are just about four months away from the adoption date for calendar-year public entities (1/1/19), there have been several implementation questions and issues that have arisen and in response, the FASB has issued a handful of Accounting Standards Updates (ASUs). This blog post will focus on ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides some relief to entities regarding two requirements of the new standard.

ASC 842, Leases, aims to increase transparency and comparability amongst entities when it comes to lease accounting and the related disclosures. This new standard brings about a lot of change, and the challenges that entities are facing while preparing for adoption are beginning to surface. If you are still looking for some helpful resources to guide you through adoption, check out this post for more information. One of the biggest challenges of adoption that has caused some heartburn amongst accountants, is the requirement of using the modified retrospective transition method upon adoption.

Under this method, an entity would have to apply transition adjustments for the two years before the standard’s actual effective date (i.e., at the beginning of the earliest period presented in the financial statements) in order to issue comparative financial statements. Essentially, entities will have to remeasure all leases entered into during this period, so it’s a significant process of catch-up for comparative reporting purposes. But wait, there is some relief! With the issuance of ASU 2018-11, the FASB has provided entities with an additional, optional transition method. The new transition method allows entities to initially apply the transition provisions at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. This transition method would eliminate the need for comparative period financial information! But remember that this additional transition method only changes when an entity is required to initially apply the transition requirements and does not change how those requirements apply.

The other relief that ASU 2018-11 provides relates to separating components of a contract, which is specific to the lessor side of accounting. ASC 842 specified that a lessor must separate lease components from nonlease components in order to allocate the consideration of the contract to the various components, then apply the appropriate accounting guidance to the lease and nonlease components, separately. Examples of nonlease components would be items like maintenance services or other activities that transfer a good or service to the customer, other than the asset being leased.

The relief provided under the ASU allows lessors to not separate the nonlease components from the associated lease component, similar to the practical expedient already allowed for lessees. However, the application of the lessor’s practical expedient is limited to circumstances in which the nonlease component(s) otherwise would be accounted for under the new revenue standard (ASC 606) and both of the following conditions are met:

  1. The timing and pattern of transfer are the same for the nonlease component(s) and associated lease component.
  2. The lease component, if accounted for separately, would be classified as an operating lease.

The ASU also provides clarity on which ASC Topic (ASC 842 or ASC 606) applies to the combined component. If a lessor elects this new practical expedient, there will also be certain disclosures required.

Hopefully both reliefs provided by ASU 2018-11 will ease the stress and difficulty associated with the adoption of ASC 842. The effective date of the new ASU varies depending on if an entity has already adopted ASC 842. If an entity has not adopted ASU 842, ASU 2018-11 follows the same effective and transition dates as ASC 842.

Disclaimer

This post is published to spread the love of GAAP and provided for informational purposes only. Although we are CPAs and have made every effort to ensure the factual accuracy of the post as of the date it was published, we are not responsible for your ultimate compliance with accounting or auditing standards and you agree not to hold us responsible for such. In addition, we take no responsibility for updating old posts, but may do so from time to time.

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