Proposed Codification improvements for lessors
FINANCIAL REPORTING INSIGHTS |
The Financial Accounting Standards Board (FASB) recently issued a proposed Accounting Standards Update (ASU), Leases (Topic 842): Codification Improvements for Lessors, 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 proposed ASU, lessors that are not manufacturers or dealers (generally financial institutions and captive finance companies) would 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 a significant lapse of time occurs between the acquisition of the underlying asset and lease commencement, those lessors would be required to apply the definition of fair value 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 cash receipts from leases within operating activities in the cash flow statement. Per the proposed ASU, lessors within the scope of ASC 942, “Financial Services – Depository and Lending,” would classify principal payments received under sales-type leases and direct financing leases within investing activities in the cash flow statement.
If finalized, the proposed ASU would be 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 proposed ASU would be effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption of the proposed ASU would be permitted.
The proposed ASU is available for comment until January 15, 2019.