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ASC 842: FASB provides an additional optional transition relief for companies

Tue, May 22, 2018 @ 03:19 AM / by Julio Dalla Costa posted in Leasing-Hot-Tips, FASB, ASC842, SAPLeaseAdmin, leasing

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LeaseAdministration-HotTipOn January 5th, 2018, the Financial Accounting Standards Board (FASB) proposed adding an optional transition method and another practical expedient for lessors to Accounting Standards Codification (ASC) 842, Leases, to reduce the cost and complexity of implementing the new standard.

With the proposed transition option, the FASB is responding to concerns raised by entities, particularly those that plan to implement new systems to comply with the guidance. These entities said that the current requirement to apply the new leases standard to the comparative periods presented in the year of adoption would be more costly and complex for them to implement than the FASB initially anticipated. 

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On March 7, 2018, the FASB approved the changes to the comparative reporting transition guidance, providing an optional transition method when adopting Topic 842.

So, what does this mean?

For many companies who recently implemented ASC 606 and used the modified retrospective approach had to recast their financial statements to the earliest periods presented. This meant that they had to go back two years to the earliest reporting period presented and incorporate the changes into the transition entry to retained earnings as the date of implementation.

At its November 29 meeting, the FASB proposed allowing entities the option to instead apply the provisions of the new leases guidance at the effective date (e.g., January 1, 2019), without adjusting the comparative periods presented. In the case of the adoption of ASC 842, if companies were to adopt on 1/1/2019, that means that companies would have to recast fiscal years 2017 and 2018 for the adoption of ASC 842.

For example, a calendar-year entity that adopts the standard on 1 January 2019 and presents two years of comparative financial statements applies the transition provisions on 1 January 2017 (i.e., the beginning of the earliest comparative period presented). Under the proposed transition method, the entity would apply the transition provisions on 1 January 2019 (i.e., the effective date).

Under the proposed new method for transition, companies will be allowed to continue using and presenting operating leasing under ASC 840 and then prospectively adopt ASC 842 on 1/1/2019. The proposal could simplify transition to the new guidance. For example, a lessee would not have to measure and recognize leases that expired prior to the effective date or consider the effects of each modification for leases that were modified more than once during the comparative period presented. Under the proposed transition method, entities could opt to continue to apply the legacy guidance in ASC 840, Leases, including its disclosure requirements, in the comparative periods presented in the year they adopt the new leases standard.

Entities that elect this option would still adopt the new leases standard using a modified retrospective transition method, but they would recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented. Entities would still be required to apply different recognition and measurement requirements in the post-adoption period to leases they entered before adoption and those they enter after adoption.

Group of three practical expedients

In addition to the optional relief proposed by the FASB, there was already the “group of three” practical expedients that was previously proposed and approved. The practical expedients apply to all leases in place at the time of transition. However, the practical expedients must be applied as a package.

The practical expedients are:

  • An entity need not reassess whether any expired or existing contracts are or contain leases.
  • An entity need not reassess the lease classification for any expired or existing leases (that is, all existing leases that were classified as operating leases in accordance with Topic 840 will be classified as operating leases, and all existing leases that were classified as capital leases in accordance with Topic 840 will be classified as finance leases).
  • An entity need not reassess initial direct costs for any existing leases.

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In addition, the standard provides this practical expedient which may be elected separately from the above:

An entity also may elect a practical expedient, which must be applied consistently by an entity to all its leases (including those for which the entity is a lessee or a lessor) to use hindsight in determining the lease term (that is, when considering lessee options to extend or terminate the lease and to purchase the underlying asset) and in assessing impairment of the entity’s right-of-use assets. This practical expedient may be elected separately or in conjunction with the practical expedients noted above.

Summary:

By the additional optional transition method as well as the practical expedients, companies are being provided with significant relief for the adoption of ASC 842. However, companies that rely extensively on leases for operating assets, the transition is likely to be labor intensive even when applying the practical expedients.

 

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FASB Issues New Standard on Financial Reporting of Leases

Mon, Mar 7, 2016 @ 05:36 AM / by Bramasol RevRec Team posted in revenue recognition, leasing, FASB

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The Financial Accounting Standards Board (FASB) has issued a new Accounting Standards Update (ASU) intended to improve financial reporting about leasing transactions, which affects all companies and other organizations that lease assets such as real estate, airplanes, and manufacturing equipment.

FASBleaseupdate.jpgAccording to the FASB project site, the new guidance, ASU No. 2016-02, Leases (Topic 842), is intended to accomplish the following objectives:

  • Results in a more faithful representation of the rights and obligations arising from leases by requiring lessees to recognize the lease assets and lease liabilities that arise from leases in the statement of financial position and to disclose qualitative and quantitative information about lease transactions, such as information about variable lease payments and options to renew and terminate leases
  • Results in fewer opportunities for organizations to structure leasing transactions to achieve a particular accounting outcome on the statement of financial position
  • Improves understanding and comparability of lessees’ financial commitments regardless of the manner they choose to finance the assets used in their businesses
  • Aligns lessor accounting and sale and leaseback transactions guidance more closely to comparable guidance in Topic 606, Revenue from Contracts with Customers, and Topic 610, Other Income
  • Provides users of financial statements with additional information about lessors’ leasing activities and lessors’ exposure to credit and asset risk as a result of leasing
  • Clarifies the definition of a lease to address practice issues that were raised about the previous definition of a lease and to align the concept of control, as it is used in the definition of a lease, more closely with the control principle in both Topic 606, and Topic 810, Consolidation

Read the related IASB information in the detailed IFRS 16 Project Status here.

 

Related News: At the upcoming SAP Insider Financials2016 (March 15-18 in Las Vegas, NV), Bramasol and Nakisa will be announcing a strategic partnership to provide companies with the technical enablement and consulting guidance to comply with the new FASB and IASB regulations.  Come hear how these two leaders will be combining forces to bring you a complete leasing solution for your SAP Enterprise Management platform. SAP Insider: Tuesday, Mar. 16 at 1:30 PM, Rm 107. Add to your schedule.

For more info on how the new FASB lease accounting standard may impact your company, click below for a RevRec Consultation.

Request RevRec Consulting Support

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Download the eBook: Transitioning to ASC 842 using the Portfolio Approach to Group Leases

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