Adopting the new leases standard just got easier

In brief , PwC US Jul 31, 2018

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The FASB has taken steps to mitigate some of the challenges for adopting the new leases standards. We explain.

What happened?

The FASB has issued new guidance that will make the adoption of the new leases standard, ASC 842, Leases, easier.

Additional transition method

Under a new transition method, comparative periods presented in financial statements in the period of adoption will not need to be restated. Instead, a reporting entity would:

  • Initially apply the new lease requirements at the effective date (e.g., January 1, 2019 for a calendar year-end public company), and recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption
  • Continue to report comparative periods presented in the financial statements in the period of adoption under current GAAP (i.e., ASC 840, Leases)
  • Provide the required disclosures under ASC 840 for all periods presented under ASC 840

The new transition method does not impact the manner of adoption. An entity will still need to apply the modified transition approach when implementing the new guidance.

New lessor practical expedient for components

The FASB also issued a new practical expedient that allows lessors to avoid separating lease and associated nonlease components within a contract if certain criteria are met. If elected, lessors will be able to aggregate nonlease components that otherwise would be accounted for under the new revenue standard with the associated lease component if the following conditions are met:

  • The timing and pattern of transfer for the nonlease component and the
    associated lease component are the same.
  • The stand-alone lease component would be classified as an operating lease if accounted for separately.

For example, if these criteria are met, lessors with eligible operating real estate leases that also provide maintenance services can elect to not separate the real estate lease component and the nonlease maintenance services component, which would otherwise need to be separated based on their standalone selling prices.

If lease and nonlease components are aggregated under this practical expedient, a lessor would account for the combined component as follows:

  • If the nonlease components are the predominant characteristic, account for the combined component under the new revenue standard. In doing so, the lessor would (a) recognize revenue consistent with the method assessed when applying the “timing and pattern of transfer” criterion to use the expedient and (b) account for all variable payments, including those related to the lease, under the revenue guidance.
  • If the nonlease components are not the predominant characteristic, account for the combined component as an operating lease under the new leases standard. All variable payments, including those related to any good or service, would be accounted for as variable lease payments.

Lessors will need to apply judgment to determine the predominant characteristic of the combined component.

If elected, the practical expedient will need to be applied consistently as an accounting policy by class of underlying asset. Additional disclosures are also required.

Why is this important?

The FASB expects the new transition method and practical expedient to make the application of the new leases standard easier and more cost effective. 

What's next?

The leases standard is effective for public business entities, not-for-profit conduit bond obligors with public debt and employee benefit plans that file their financial statements with the SEC, no later than annual periods beginning after December 15, 2018 (i.e., January 1, 2019 for calendar-year entities) and interim periods within those years. All other entities must adopt the new standard no later than annual periods beginning after December 15, 2019 (i.e., January 1, 2020 for calendar-year entities) and interim periods the following year.

For entities that have not adopted the new leases standard, the effective date for the new lessor practical expedient is the same as the effective date for the new leases standard. Entities that have already adopted the new leases standard may apply the new lessor practical expedient (1) to the first reporting period following the issuance of the practical expedient or (2) at the original effective date of the new leases standard. Either retrospective or prospective adoption is  permitted .

Please refer to PwC's leases resources page on CFOdirect for guidance to help you prepare to adopt the new leases standard.

To have a deeper discussion contact:

Scott Tornberg

Partner, National Professional Services Group, PwC US

Email

Ashima Jain

Managing Director, National Professional Services Group, PwC US

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David Schmid
IFRS & US Standard Setting Leader, National Professional Services Group, PwC US
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