Lease accounting

Adopting the new FASB lease accounting standard (ASC 842)

The FASB’s lease accounting standard change, ASU 2016-02, Leases (Topic 842), presents dramatic changes to the balance sheets of lessees. Among many of the changes, lessor accounting is updated to align with certain changes in the lessee model and the new revenue recognition standard.

Our comprehensive accounting and reporting guide on lease accounting is available to help you with your company’s implementation. 

Quick update on what is changing

  • The FASB and IASB each issued new lease guidance in early 2016.
    • The boards differ in their approaches to lessee accounting.
  • Under the FASB's approach, lessees will need to recognize a right-of-use asset and a lease liability for virtually all of their leases. For income statement purposes, the FASB retained a dual approach, requiring leases to be classified as either operating or financing, similar to today. Lessor accounting is similar to the current model.
    • The IASB’s approach presents virtually all leases in a manner similar to today’s financing leases.
    • The boards are more closely aligned on the lessor accounting, which is substantially equivalent to current US GAAP and IFRS.
  • The guidance significantly changes lessee accounting for leases and impacts financial statement presentation and financial metrics, including many that relate to debt covenants, key performance indicators, and perhaps compensation arrangements.
  • The SEC would not object to certain PBEs (i.e., entities that are PBEs solely due to the inclusion of their financial statements or financial information in another entity’s filing with the SEC) adopting the new leases standard using the timeline otherwise afforded private companies. Refer to In brief US2017-22, SEC extends revenue and leases effective dates for certain PBEs, for further details.
  • Early adoption is permitted.
  • Transition: The FASB’s standard is required to be adopted using a modified retrospective transition approach, which requires application of the new guidance at the beginning of the earliest comparative period presented in the year of adoption.
    • Proposed simplified transition: In January 2018, the FASB issued an exposure draft proposing additional amendments (“targeted improvements”) to the new leases guidance. The proposed amendments would allow entities to elect a simplified transition approach, and reduce the need for many lessors to separate lease and non-lease components. Comments were due on February 5, 2018, and the FASB is reviewing comments received. The proposed amendments would have the same effective date as the new leases standard.
  • In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842. This ASU amended the new leases guidance to add an optional transition practical expedient for land easements that allows an entity to continue applying its current accounting policy for land easements that existed or expired before the standard’s effective date, if they were not previously accounted for as leases. The practical expedient effectively grandfathers the prior accounting. The amendment has the same effective date as the new leases standard.
  • In March 2018, the FASB tentatively approved a new practical expedient for lessors adopting the new leases standard. When issued, lessors will have the option to aggregate nonlease components with the related lease component upon adoption of the new standard if certain conditions are met. If a lessor elects this practical expedient, it would account for the combined component based on its predominant characteristic. If the nonlease component is predominant, a lessor would account for the combined component as revenue; otherwise, it would account for it as an operating lease. If elected, the practical expedient will need to be applied consistently to similar classes of underlying assets.
  • Also at the March 2018 meeting, the FASB agreed to allow lessors to make accounting policy elections to (1) exclude sales tax collected from the lessee from the transaction price and/or (2) exclude property taxes and insurance costs from variable consideration when those costs are paid directly by the lessee and the uncertainty in the amount paid is not expected to be ultimately resolved. The proposed improvements will be exposed for public comment.

Featured videos


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Leasing - Lessor Practical Expedient

Adoption of the leases standard just got easier. Check out this video in our Leasing series to see how lessors can avoid separating lease and nonlease components.


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Leasing - How lessees should account for finance leases

The new leases standard is rapidly approaching. Watch now for practical examples on how lessees should account for their finance leases.

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US Strategic Thought Leader, National Professional Services Group, PwC US

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