On July 30, 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-11, Leases (Topic 842): Targeted Improvements.
The update gives entities an additional transition option to choose from when adopting FASB Accounting Standards Codification® (ASC) Topic 842, Leases. It also provides lessors with a practical expedient that, if applied, wouldn’t require separating lease and nonlease components in certain circumstances.
The ASU provides an additional transition option, which allows entities to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption, rather than the earliest period presented.
Electing this transition option will result in leases being accounted for under two different bases of accounting:
- ASC Topic 842, Leases—year of adoption
- ASC Topic 840, Leases—comparative periods
Entities electing this transition option must provide the required ASC Topic 842 disclosures—including transition disclosures—for the year of adoption. The comparative periods will continue to be subject to the disclosure requirements in ASC Topic 840.
Separating Lease and Nonlease Components for Lessors
ASU 2018-11 provides lessors with a practical expedient—similar to the practical expedient for lessees—to elect, by class of underlying assets, to account for nonlease and lease components as a single arrangement.
This practical expedient would only be available to lessors if the nonlease components would otherwise be accounted for under ASC Topic 606, Revenue from Contracts with Customers, and both of the following criteria are met:
- The timing and pattern of revenue recognition for the nonlease components and related lease component are the same.
- The lease component would be classified as an operating lease if accounted for separately.
If the nonlease components are the predominant component of the combined arrangement, the arrangement should be accounted for under ASC Topic 606. Otherwise, it should be classified as an operating lease under ASC Topic 842.
Entities electing this practical expedient must disclose, by class of underlying asset, the following:
- The fact the practical expedient was elected
- Which class, or classes, of underlying assets to which the practical expedient was applied
- The nature of the lease and nonlease components that were combined
- The nature of any nonlease components that weren’t eligible for the practical expedient
- Whether the combined arrangement was accounted for under ASC Topic 606 or 842
Transition and Effective Dates
For entities that early adopted ASC Topic 842, the practical expedient to not separate lease and nonlease components may be elected either in the first period following the issuance of the update or on the original effective date of ASC Topic 842. The practical expedient may be applied either retrospectively or prospectively.
For entities that haven’t early adopted, the effective dates are the same as currently required under ASC Topic 842. This means they’re effective for fiscal years beginning after December 15, 2018, including interim periods within those financial years, for the following:
- Public business entities
- Not-for-profit entities that have issued, or are a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or over-the-counter market
- Employee benefit plans that file financial statements with the US Securities and Exchange Commission
All other entities are required to adopt the new lease standard in fiscal years beginning after December 15, 2019, and interim periods in fiscal years beginning after December 15, 2020. Early adoption is permitted for all entities.
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For more information about the new lease standard, refer to our guide: ASC Topic 842, Leases: The FASB’s New Guidance and Their Effect on Leasing Arrangements.
For additional questions or help understanding how the new standard may affect your business, contact your Moss Adams professional.