The FASB has issued new guidance that will make the adoption of the new leases standard, ASC 842, Leases, easier.
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:
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.
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:
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:
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.
The FASB expects the new transition method and practical expedient to make the application of the new leases standard easier and more cost effective.
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.
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