ASC 842: Lessee transition
WHITE PAPER |
The transition guidance in Topic 842, Leases, of the Financial Accounting Standards Board’s Accounting Standards Codification (ASC) is quite complex, primarily because the guidance that should be applied in a particular situation varies depending on (a) which transition method and practical expedient(s) are elected and (b) the classification of the lease under both legacy generally accepted accounting principles (ASC 840, Leases) and ASC 842. We have published a white paper, ASC 842: Lessee transition, to assist a lessee in identifying and understanding the applicable transition guidance in ASC 842.
Our white paper discusses ASC 842’s effective date and its available transition methods and practical expedients. We also discuss what we believe will be the most common transition scenario for lessees, which results in the least complex initial and subsequent measurement for leases transitioned to ASC 842. Under that scenario, the following elections would be made:
- Transition method B, which results in the modified retrospective application of ASC 842 to the beginning of the period of adoption through a cumulative-effect adjustment recognized as of the beginning of that period. Under this transition method, comparative periods are not retrospectively adjusted.
- The package of practical expedients, which results in the lessee not reassessing (using the guidance in ASC 842) its prior conclusions under ASC 840 regarding: (a) whether a preexisting contract is or contains a lease, (b) whether a preexisting lease should be classified as an operating or finance lease and (c) whether the initial direct costs capitalized for a preexisting lease qualify for capitalization.
- The land easement practical expedient, which results in the lessee not assessing whether preexisting or expired land easements that were not previously accounted for as leases under ASC 840 are or contain leases under ASC 842.
In addition to this scenario, our white paper also identifies what we believe will be the seven less common transition scenarios for lessees. For each of the eight identified transition scenarios, a transition grid is provided, which captures the guidance that should be used under each scenario to initially and subsequently measure the lease liabilities and right-of-use assets for leases transitioned to ASC 842. The most effective use of the white paper results when a lessee identifies the transition elections it will make and then identifies the transition grid that corresponds to those elections.
This resource center provides information about the FASB 842 lease accounting standard, guidance and implementation ideas.