United States

FASB issues amendments to ASC 842


In response to difficulties encountered in implementation of Accounting Standards Update (ASU) 2016-02, Leases (ASC 842), the Financial Accounting Standards Board (FASB) recently issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides:

  • Another transition method in addition to the existing modified retrospective transition method prescribed by Accounting Standards Codification (ASC) Topic 842. ASU 2018-11 allows entities to initially apply ASC 842 at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Entities that elect this approach should report comparative periods in accordance with ASC 840, “Leases,” (including disclosure requirements).
  • A practical expedient under which lessors may elect, by class of underlying assets, to not separate nonlease components from the associated lease component, similar to the expedient provided for lessees. However, the lessor practical expedient is limited to circumstances in which the nonlease component or components otherwise would be accounted for under the new revenue guidance and both (a) the timing and pattern of transfer are the same for the nonlease component(s) and associated lease component and (b) the lease component, if accounted for separately, would be classified as an operating lease. If the nonlease component or components associated with the lease component are the predominant component of the combined component, an entity should account for the combined component in accordance with ASC 606, “Revenue from Contracts with Customers.” Otherwise, the entity should account for the combined component as an operating lease in accordance with ASC 842. If a lessor elects the practical expedient, certain disclosures are required.

For entities that have not adopted Topic 842 before the issuance of ASU 2018-11, the effective date and transition requirements for the amendments related to separating components of a contract are the same as those in ASU 2016-02. For entities that have adopted Topic 842 before the issuance of ASU 2018-11, the practical expedient for separating components may be elected either in the first reporting period following the issuance of ASU 2018-11 or at the original effective date of Topic 842 for that entity, and the practical expedient may be applied either retrospectively or prospectively. All entities that elect the practical expedient related to separating components of a contract must apply the expedient, by class of underlying asset, to all existing lease transactions that qualify for the expedient at the date elected.