On January 5, 2018, the Financial Accounting Standards Board (FASB) issued an exposure draft to amend the new lease accounting standard.
The proposed guidance would give entities an additional transition method to choose from when adopting Accounting Standards Codification (ASC) Topic 842, Leases. It would also provide lessors with a practical expedient that, if applied, wouldn’t require separating lease and nonlease components in certain circumstances.
The new lease standard requires a modified retrospective method of transition with a cumulative-effect adjustment to the opening balance of retained earnings at the beginning of the earliest period presented in the financial statements. This transition method results in all periods included in the financial statements being presented on the same basis of accounting.
The proposed guidance provides an additional transition method, which would allow 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 method would result in the comparative periods included in the financial statements falling under two different bases of accounting for leases:
- ASC Topic 842 in the year of adoption
- ASC Topic 840 in the comparable prior periods
Separating Lease and Nonlease Components for Lessors
The proposal would provide 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.
However, the practical expedient would only be available to lessors if 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 combined single lease component is classified as an operating lease.
Transition and Effective Date
The proposed changes would be applied using the same effective dates as currently required under ASC Topic 842. This means they’d be effective in fiscal years beginning after December 15, 2018, including interim periods within those financial years for any of 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 an over-the-counter market
- Employee benefit plans that file financial statements with the US Securities and Exchange Commission
All other entities will be 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.
The FASB has invited individuals and organizations to review and comment on all matters in the exposure draft. Preparers and users of financial statements who wish to evaluate the proposal and provide feedback to the FASB should provide written comments by February 5, 2018.
We're Here to Help
For more information on the current lease standard, read our guide. For help determining the impact of the proposed guidance on your organization and for further guidance on its effect on financial statements, contact your Moss Adams professional.