Lessee financial statement disclosures

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Video , PwC US Apr 04, 2019

Watch our video for leases disclosures from the Lessee’s point of view

Need to get your head around leasing disclosures? Watch this video for disclosures from the Lessee’s point of view. Hear Marc Jerusalem discuss key disclosure considerations and more.


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Duration: 7:32


Hi, I’m Marc Jerusalem, a director in PwC’s National Office.

Now that the new Leases standard is effective for many companies, today, I’m going to cover the top five focus areas for leasing disclosures, from the lessee’s perspective:

  1. Qualitative information
  2. Significant judgements made in applying the leases guidance
  3. Quantitative information
  4. Practical expedients, and finally
  5. Transition guidance

The objective of the disclosure requirements in the leases standard is to enable financial statement users to understand the amount, the timing and the uncertainty of cash flows arising from leases. So let’s begin.

The slides in this video include all 32 disclosures required on leseeses by the new leases guidance. Some of these may be familiar to you as they were also required by the old leases guidance, but many of them are new. So first, let’s talk about the qualitative disclosures.

As you can see, these disclosures focus on both what is on the balance sheet as well as what contingent items are not on the balance sheet, in order to inform the reader about the potential unrecognized variability in the cash flows. Accordingly, lessees must tell users about the nature of its leases, including:

  • A general description of those leases
  • The basis, terms and conditions upon which any variable lease payments are determined
  • Whether or not there are any renewal options or termination options and whether those options have been included in the lease liability or have been excluded from the lease liability
  • Do the leases contain any residual value guarantees?
  • Or do they contain any restrictions or covenants on the lessee

Finally, lessees also have to disclose any significant leases that have not yet commenced as those can obviously affect future cash flows.

Second, a lessee is required to disclose information about the significant assumptions and judgments that they made in arriving at the amounts in their lease liability and right-of-use asset. Now these are all new. Since operating leases are now on the balance sheet, these disclosures help inform the reader about some of the judgements they needed to make to measure those liabilities. This includes, telling the reader about how one determined whether a contract is, or contains a lease, how did the company allocate consideration between the lease components and the non-lease components. And finally, how did they come about the discount rates that they needed to measure those lease liabilities.

Third, quantitative guidance. This gets into the meat of the leases disclosures. Now, just as a reminder, a company can have both operating leases and finance leases and the standard explicitly tells us that those leases cannot be combined in the same balance sheet financial statement line items. So, similarly, the FASB required that all the quantitative disclosures that are required for leases, must also be segregated between operating leases and finance leases.

So as an example, the company has to disclose its:

  • Finance lease costs (segregated between interest and amortization)
  • It’s operating lease costs, now notice I keep on using the word “costs”, rather than “expenses”, and that’s because the FASB recognized that sometimes lease expenses would be capitalized to the cost of another asset, so the disclosure requirements are to talk about the costs rather than the expenses
  • A lessee has to disclose the short-term lease costs (excluding expenses related to leases with a lease term of one month or less)
  • As well as the variable lease costs that is allocated to the leases.
    • Now again as a reminder, leases can often be in arrangements that contain both lease and nonlease components, and whenever that occurs, both the fixed and the variable consideration have to be allocated between both the lease and the nonlease components. So for the leases disclosure, we only have to talk about the variable consideration allocated to the leases component.
  • And finally, one has to disclose sublease income on a gross basis, if we have any, as well as
  • The net gain or loss recognized from sale/leaseback transactions

Continuing with the quantitative disclosures, a lessee has to disclose the cash flow information for it’s lease costs segregated between the finance lease and the operating leases. Now, specifically this includes the cash paid for amounts that are included in the measurement of the lease liabilities, as well as, the supplemental noncash information discussing how the lease liabilities and right-of-use assets have changed resulting from reassessments or remeasurements of those lease liabilities. Finally, some additional new disclosures. A company has to disclose the weighted-average remaining lease term (based on remaining lease liability), as well as, the weighted-average discount rate (based on the remaining lease payments).

Similar to the previous guidance on capital leases, a company also has to show a maturity analysis of its undiscounted cash flows on an annual basis for each of the next five years and a total of amounts thereafter that reconciles back to the lease liabilities that were recognized on the balance sheet. Again, separated between the operating leases and the finance lease obligations.

Fourth, if a lessee elects certain practical expedients, it’s required to disclose them. So, first, if a lesses elects the exemption for short-term lease recognition, then it has to disclose that it’s elected that exemption, as well as, to which underlying classes of assets that it has elected that exemption and it has to disclose if the short-term lease expense for the period doesn’t reasonably reflect the lessees short-term lease commitments. A lessee also has to disclose if it’s made the accounting policy election to not separate lease and non-lease components, including again, which classes of underlying assets it has applied that expedient to.

Finally, and fifth, a lessee is required to disclose its transition related practical expedients. Now, these include the package of practical expedients, which allows the lessee to not reassess whether any contracts, existing or expired, contain leases. It allows them not to reassess their lease classification or their initial direct costs. They also have to disclose whether or not they’ve used hindsight to reevaluate their lease term or their impairment of assets. They have to disclose whether or not they’ve reassessed land easements. And they have to disclose the transition method elected, whether transitionioning as of the earliest year presented, or as of the date that the new standard is effective.

So let’s wrap-up. I’ve highlighted today a few of the key areas of focus for leasing disclosures from the lessee’s perspective. For additional information on lessee disclosures, check out PwC’s Lease accounting guide available on CFOdirect.com.

Thank you.


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