ASU 2019-01—Leases (Topic 842): Codification Improvements
On February 25, 2016, the FASB issued Accounting Standards Update No. 2016- 02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing essential information about leasing transactions.
The Board has an ongoing annual improvements project on its agenda to clarify the Codification more generally and/or to correct unintended application of guidance. Items included in that project are not expected to have a significant effect on current accounting practice or create a significant administrative cost for most entities. The amendments in this Update are of a similar nature to the items typically addressed in the Codification improvements project. However, the Board decided to issue a separate Update for the improvements related to Update 2016- 02 to increase stakeholders’ awareness of the amendments and to expedite the improvements.
The Board did not create a transition resource group (TRG) to address the leases guidance because many of the concepts used in Topic 842, Leases, are similar to those currently used in Topic 840, Leases. Although a formal TRG was not created, the Board and staff have been assisting stakeholders during this transitional period by responding to inquiries received and proactively seeking feedback on potential implementation issues that could arise as organizations implement Topic 842. The amendments in this Update include the following items brought to the Board’s attention through those interactions with stakeholders:
- Determining the fair value of the underlying asset by lessors that are not manufacturers or dealers (Issue 1)
- Presentation on the statement of cash flows—sales-type and direct financing leases (Issue 2)
- Transition disclosures related to Topic 250, Accounting Changes and Error Corrections (Issue 3).
Issue 1: Determining the Fair Value of the Underlying Asset by Lessors That Are Not Manufacturers or DealersTopic 840 provides an explicit exception for lessors who are not manufacturers or dealers (generally financial institutions and captive finance companies) for determining fair value of the leased property (underlying asset under Topic 842). For those entities, fair value is ordinarily the underlying asset’s cost, reflecting any volume or trade discounts that may apply, instead of fair value as defined in Topic 820, Fair Value Measurement. Topic 842 did not carry forward this exception. Therefore, lessors previously qualifying for the exception in Topic 840 are now required to apply the definition of fair value in Topic 820, which is defined as the price that would be received to sell the underlying asset in an orderly transaction between market participants at the measurement date (exit price). Those lessors were concerned that this change in determining fair value will not provide decisionuseful financial information because, unlike current practice, certain acquisition costs (for example, sales taxes and delivery charges) would be expensed at lease commencement and subsequently recognized through increased interest income for sales-type and direct financing leases. Those lessors noted their belief that it was neither the Board’s intent to change those lessors’ financial reporting nor its intent to eliminate the exception.
The amendments in this Update reinstate the exception in Topic 842 for lessors that are not manufacturers or dealers. Specifically, those lessors will use their cost, reflecting any volume or trade discounts that may apply, as the fair value of the underlying asset. However, if significant time lapses between the acquisition of the underlying asset and lease commencement, those lessors will be required to apply the definition of fair value (exit price) in Topic 820.
Issue 2: Presentation on the Statement of Cash Flows—Sales-Type and Direct Financing LeasesTopic 840 does not provide guidance on how cash received from leases by lessors from sales-type and direct financing leases should be presented in the cash flow statement. The Board was informed that lessors within the scope of Topic 942, Financial Services—Depository and Lending, have been presenting “principal payments received under leases” within investing activities on the basis of an illustrative example in Topic 942. Those lessors expressed a preference for continuing this presentation, which is consistent with the presentation of principal payments received on loans more generally. Topic 842 introduced guidance that requires all lessors to present all cash receipts from leases within operating activities. The illustrative example in Topic 942 was not eliminated when Topic 842 was issued. Consequently, conflicting guidance exists on the presentation of “principal payments received from leases” under sales-type and direct financing leases.
The amendments in this Update address the concerns of lessors within the scope of Topic 942 about where “principal payments received under leases” should be presented. Specifically, lessors that are depository and lending institutions within the scope of Topic 942 will present all “principal payments received under leases” within investing activities.
Issue 3: Transition Disclosures Related to Topic 250, Accounting Changes and Error CorrectionsTopic 842 requires an entity (a lessee or lessor) to provide transition disclosures under Topic 250 upon adoption of Topic 842, except for the requirements in paragraph 250-10-50-1(b)(2). That paragraph otherwise would have required an entity to disclose, in the annual period in which a change in accounting principle is made, the effect of the change on the following items for the current annual period and any prior annual periods retrospectively adjusted:
- Income from continuing operations
- Net income (or other appropriate captions of changes in the applicable net assets or performance indicator)
- Any other affected financial statement line item
- Any affected per-share amounts.
The amendments in this Update clarify the Board’s original intent by explicitly providing an exception to the paragraph 250-10-50-3 interim disclosure requirements in the Topic 842 transition disclosure requirements.
The amendments in this Update for Issue 1 affect all lessors that are not manufacturers or dealers (generally financial institutions and captive finance companies).
The amendments in this Update for Issue 2 affect all lessors that are depository and lending entities within the scope of Topic 942.
The amendments in this Update for Issue 3 affect all entities that are lessees or lessors.
Transition and Effective Dates
The transition and effective date provisions for this Update apply to Issue 1 and Issue 2. They do not apply to Issue 3 because the amendments for that Issue are to the original transition requirements in Topic 842.
The amendments in this Update amend Topic 842. That Topic has different effective dates for public business entities and entities other than public business entities. The effective date of those amendments is for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years for any of the following:
- A public business entity
- 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 overthe-counter market
- An employee benefit plan that files financial statements with the U.S. Securities and Exchange Commission (SEC).
Early application is permitted. An entity should apply the amendments as of the date that it first applied Topic 842, using the same transition methodology in accordance with paragraph 842-10-65-1(c).