Leases: Clarified implementation guidance and disclosure requirements
FINANCIAL REPORTING INSIGHTS |
The Financial Accounting Standards Board (FASB) recently issued Accounting Standards Update (ASU) 2019-01, Leases (Topic 842): Codification Improvements, to address two issues lessors sometimes encounter in applying Topic 842 of the FASB’s Accounting Standards Codification (ASC), “Leases”:
- Determining the fair value of the underlying asset by lessors that are not manufacturers or dealers – Per the ASU, lessors that are not manufacturers or dealers (generally financial institutions and captive finance companies) should use their cost, reflecting any volume or trade discounts that may apply, as the fair value of the underlying asset instead of fair value as defined in ASC 820, “Fair Value Measurement.” However, if significant time lapses between the acquisition of the underlying asset and lease commencement, those lessors are required to apply the definition of fair value (i.e., exit price) in ASC 820.
- Presentation in the cash flow statement of cash received from leases by lessors from sales-type and direct financing leases – ASC 842 requires all lessors to classify all cash receipts from leases within operating activities in the cash flow statement. Per the ASU, however, lessors that are depository and lending institutions within the scope of ASC 942, “Financial Services – Depository and Lending,” should classify principal payments received under sales-type leases and direct financing leases within investing activities in the cash flow statement.
The ASU also exempts both lessees and lessors from having to provide the interim disclosures required by ASC 250-10-50-3 in the fiscal year in which a company adopts the new leases standard.
The amendments addressing the two lessor accounting issues are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, for (a) a public business entity, (b) a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed or quoted on an exchange or an over-the-counter market and (c) an employee benefit plan that files financial statements with the SEC. For all other entities, the effective date is for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.
Early application is permitted. An entity should apply the amendments as of the date that it first applied ASC 842, using the same transition methodology in accordance with ASC 842-10-65-1(c). The transition and effective date provisions for ASU 2019-01 do not apply to the interim disclosure amendment because that amendment is to the original transition requirements in ASC 842.