This simplifies transition, as companies won’t need to record leases that expired prior to 1/1/19 or consider the effects of lease modifications during the comparative periods presented. Under Topic 842, related-party leases should be accounted for based on their legally enforceable terms and conditions. 18. AdButler.ads.push({handler: function(opt){ AdButler.register(165519, 461032, [300,250], 'placement_461032_'+opt.place, opt); }, opt: { place: plc461032++, keywords: abkw, domain: 'servedbyadbutler.com', click:'CLICK_MACRO_PLACEHOLDER' }}); statements by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the adoption year. 1 ASU 2016-02, “Leases (Topic 842): Section C – Background Information and Basis for Conclusions,” paragraph BC14, FASB, https://fasb.org/jsp/FASB/Page/SectionPage&cid=1176156316498. Often, agreements that contain a lease under Topic 842 may be characterized as service agreements, license agreements, or similar. A further expedient provided in ASC Topic 842 applies only to private entities. Consider if any plans to go public might influence a decision to use a practical expedient designed for private companies only. n 2019, the new FASB lease accounting standard, ASC 842, began to go into effect for public company filers. Edited by CPAs for CPAs, it aims to provide accounting and other financial professionals with the information and analysis they need to succeed in today’s business environment. The short version is that the look-back financials are no longer required. This is a change in practice from the legacy guidance within Topic 840, which required entities to look beyond the terms of the arrangement and account for the lease based on the economic substance of the arrangement. If you were worried about comparative reporting, the new transition option is a relief. Furthermore, this update provides clarity in its implementation guidance (e.g., Example 10, 350-30-55-30) that land easements first should be assessed under ASC Topic 842 to determine whether they meet the definition of a lease and that permanent easements do not meet the definition of a lease under ASC Topic 842. Prior periods presented would continue under guidance in ASC 840. Many public companies found that determining incremental borrowing rates for their leases required accumulating more data and making more judgments than initially thought. THE JOURNEY – GETTING STARTED. This practical expedient relieves the entity from having to apply the provisions of ASC Topic 842 at the beginning of the earliest period presented in the year of adoption, which would require it to restate the prior years in comparative financial statements. document.write('<'+'div id="placement_282686_'+plc282686+'">'); • Recognize the effects of applying ASC 842 as a cumulative-effect adjustment to retained earnings as of the effective date; The entity would not: • Restate comparative periods • Provide the disclosures required by ASC 842 for the comparative periods. During the transition period, entities are also provided relief from having to reevaluate and exclude certain outlays classified as initial direct costs under ASC Topic 840. Such election, however, is not available to entities that followed the guidance provided in ASC Topic 840; thus, entities previously following that guidance must apply the provisions of ASC Topic 842 to land easements existing or expiring prior to its passage. Entities that choose this transition method should nonetheless be cognizant that the financial statements will be less comparable in the year of adoption because Topic 840 will continue to be applied in comparative periods. Evaluate implementation approaches including the available practical expedients, particularly those intended to simplify transition and those used in determination of the discount rate. recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without adjusting the comparative periods presented. Heather Winiarski, CPA is a shareholder at Mayer Hoffman McCann PC, Kansas City, Mo. Determination will need to be made as to adoption of ASC 842, which is available on a modified retrospective basis or through a cumulative effect adjustment as of the beginning of the year of adjustment. It is worth emphasizing, however, that several mitigating factors exist with respect to effects of adopting Topic 842 on an entity’s balance sheet, including these1: The time required to prepare for Topic 842, specifically for organizations with significant leasing activities, should not be underestimated. Most entities, such as a trucking company or airline with many leases existing at that date, would elect to avail themselves of this expedient given the significant cost of having to review all contracts to determine whether they do or do not contain a lease or a lease component. This practical expedient relieves the entity from having to apply the provisions of ASC Topic 842 at the beginning of the earliest period presented in the year of adoption, which would require it to restate the prior years in comparative financial statements. Other entities, including private companies, have an additional year to prepare for adoption. Per correspondence with the Region 1 office of the NCUA, the answer to the first question is there is no additional reporting necessary on the Call Report to show the cumulative-effect adjustment. If you were worried about comparative reporting, the new transition option is a relief. Entities may record a cumulative adjustment to the opening balance of retained earnings in the year of adoption. An example derived from ASC 842 illustrates the transition for an operating lease:5 The effective date for the entity to adopt ASC 842 is Jan. 1, 2019. Topic 842 characterizes operating lease liabilities as operating liabilities instead of debt and therefore typically should not affect most debt covenant calculations. Some companies might find it necessary to revisit processes and controls over maintaining information regarding lease contracts and disseminating that information across the organization. As we have seen so far, the adoption of ASC 842 makes accounting much more complex for traditional operating leases. Operating leases (ASC 842) The amortization of the ROU asset for operating leases is not recognized as depreciation expense. var plc289809 = window.plc289809 || 0; GAAP (ASC 840) to the new lease accounting standard (ASC 842). Under this approach, the standard is implemented either (1) as of the earliest period presented and through the comparative periods in the entity’s financial statements or (2) as of the effective date of ASC 842 (the “Comparatives Under 840 Option”), with a cumulative-effect adjustment to equity in the first period in which ASC 842 is adopted. For example, as a result of the adoption of ASC Topic 842 on January 1, 2019, Griffin-American Healthcare REIT IV recognized an initial amount of operating lease liability of $5,334,000 in its condensed consolidated balance sheet for all of its ground leases. Lease accounting under ASC 842: practice issues and implementation We will be starting soon Tuesday, May 15, 2018 1:00 - 2:30 pm ET Please disable pop-up blocking software before GAAP (ASC 840) to the new lease accounting standard (ASC 842). The lease component, if accounted for separately, would be classified as an operating lease. The impact on lessees. div.id = "placement_461032_"+plc461032; AdButler.ads.push({handler: function(opt){ AdButler.register(165519, 461033, [300,600], 'placement_461033_'+opt.place, opt); }, opt: { place: plc461033++, keywords: abkw, domain: 'servedbyadbutler.com', click:'CLICK_MACRO_PLACEHOLDER' }}); ASC 842 closes the lease accounting off-balance sheet ... n 2019, the new FASB lease accounting standard, ASC 842, began to go into effect for public company filers . Such rights may be permanent or limited and may be exclusive or shared with other entities. Effective Dates. ASU 2018-10 grants this relief to lessors provided that both of the following conditions are met: Furthermore, the guidance requires the lessor to follow the guidance related to the predominant component of the combined component. Many companies that recently have implemented a major new accounting standard might be accustomed to recording an adjustment to beginning retained earnings for the cumulative effect of adopting the new standard. Introduction to the ASC 842 accounting standard In 2019, the latest FASB lease accounting standard, ASC 842, began to go into effect for public company filers. Also, you must recognize the effects of applying ASC 842 as a cumulative-effect adjustment to retained earnings as of the effective/adoption date. Instead, those short-term leases would be recorded similarly to operating leases under ASC Topic 840, with the lease payments being recognized into profit or loss on a straight-line basis over the lease term. When making the transition to the new lease standard, organizations must choose between two possible implementation methods, both involving the modified retrospective approach: 1) the “comparative method” and 2) the “effective date method.” The more costly and time-consuming approach involves applying the new standard as of the beginning of the earliest period presented within the financial statements (comparative method). Companies should determine whether a lease administration software or enterprise resource planning module is appropriate or if leases and related journal entries will be administered using spreadsheet software or other manual systems. var plc456219 = window.plc456219 || 0; Similar relief was not originally provided to the lessor, however, thereby requiring the entity to evaluate lease arrangements to determine any lease and nonlease components requiring separation. The alternative is to “recognize a cumulative-effect adjustment to the opening balance of retained earnings” at their adoption date rather than on Jan. 1, 2017. https://fasb.org/jsp/FASB/Page/SectionPage&cid=1176156316498. Despite this simplification in Topic 842, identifying legally enforceable terms and conditions can be difficult in situations when a formal written agreement does not exist. Explore Crowe insights and learn more about how we can help. The practical expedients in ASU 2018-11 provide for the following: This practical expedient relieves the entity from having to apply the provisions of ASC Topic 842 at the beginning of the earliest period presented in the year of adoption, which would require it to restate the prior years in comparative financial statements. • Date of initial application — The first day an entity applies the transition provisions of ASC 842 to its Although the effective date for implementing the standard has passed for publicly held entities, private entities still have time to make changes. ASC Topic 842 provides lessees with an option to avoid separating nonlease components from their related lease components. Changes in the IFRS 16 and the FASB ASC 842 lease accounting requirements could have a significant financial effect on your organization. (function(){ Leases (Topic 842) No. This company would compute the retained earnings adjustment as of January 1, 2017, and adjust the comparable 2017 and 2018 income statements and the comparable 2018 balance sheet. [If ASC 606 had an impact…whether in presentation only (e.g., gross vs. net) or recognition-related:] The income statement impact of adopting ASC 606 for the period ending XXX is outlined below: [Tailor this chart to include only those line items impacted by ASC 606.] Many public companies that adopted Topic 842 applied the transition provisions using the effective date method, and many private companies also are expected to choose to apply the transition provisions as of the effective date in order to reduce the costs of applying the guidance. A reclassification of an operating lease under ASC Topic 840 to an operating lease under ASC Topic 842 would have no effect on the income statement. The short version is that the look-back financials are no longer required. Private companies can elect to use a practical expedient under Topic 842, which allows the use of a risk-free interest rate, scaled to the length of the lease, in lieu of a calculated discount rate. For private companies, determining an incremental borrowing rate, when used as the discount rate, could be a challenging endeavor especially if an entity has few (or no) recent debt issuances. Here are some key lessons learned from public companies, as well as other considerations that private companies should evaluate as part of their implementation plan for the significant changes to lease accounting. AdButler.ads.push({handler: function(opt){ AdButler.register(165519, 282686, [300,250], 'placement_282686_'+opt.place, opt); }, opt: { place: plc282686++, keywords: abkw, domain: 'servedbyadbutler.com', click:'CLICK_MACRO_PLACEHOLDER' }}); if (!window.AdButler){(function(){var s = document.createElement("script"); s.async = true; s.type = "text/javascript";s.src = 'https://servedbyadbutler.com/app.js';var n = document.getElementsByTagName("script")[0]; n.parentNode.insertBefore(s, n);}());} var AdButler = AdButler || {}; AdButler.ads = AdButler.ads || []; Thus, if most of the consideration is related to the lease component, the lessor would follow the guidance in ASC Topic 842. The purpose of this article is to summarize and discuss the expedients provided in the standard and its recent amendments. The alternative is to “recognize a cumulative-effect adjustment to the opening balance of retained earnings” at their adoption date rather than on Jan. 1, 2017. })(); if (!window.AdButler){(function(){var s = document.createElement("script"); s.async = true; s.type = "text/javascript";s.src = 'https://servedbyadbutler.com/app.js';var n = document.getElementsByTagName("script")[0]; n.parentNode.insertBefore(s, n);}());} var AdButler = AdButler || {}; AdButler.ads = AdButler.ads || []; As mentioned previously, this election significantly reduced the burden in transitioning to the new standard by allowing entities to avoid having to restate prior-year comparative financial statements and to make related disclosures. If not elected, the lessee must apply other guidance with respect to its accounting treatment of nonlease components (e.g., application of ASC Topic 350, “Intangibles—Goodwill and Others”). Although ASU 2018-10, “Codification Improvements to Topic 842, Leases,” does not specifically address any additional practical expedients, it does provide several amendments that clarify existing guidance with respect to ASC Topic 842 and subsequent updates; this is consistent with FASB’s ongoing simplification. Banks with whom the FASB conducted outreach indicated they are unlikely to “call a loan” with a good customer because of a technical default arising solely because of the adoption of new GAAP. Many entities continue to rely upon simple spreadsheets to accumulate information, which may be inadequate in documenting the volume and complexity of leases and evaluating the impact of changes in existing lease terms and escalation clauses. ASC Topic 842 defines initial direct costs as those that could have been avoided had the entity not entered into a lease agreement. This guide was fully updated in … var abkw = window.abkw || ''; })(); var AdButler = AdButler || {}; AdButler.ads = AdButler.ads || []; With respect to ASC Topic 842, this update provides amendments relating to 16 issues, addressing the concerns of various stakeholders in their comment letters. Prior to ASC Topic 842, the diversity of accounting practice with respect to such easements was such that some entities followed the guidance provided in ASC Topic 350 or ASC Topic 360, “Property, Plant, and Equipment,” while others treated such land easements as leases and applied the provisions of ASC Topic 840. To address this complexity, the Financial Accounting Standards Board (FASB) has provided several practical expedients entities may use for the transition.Effective dates 1. When determining whether or not to use any of these expedients, remember that some are industry-specific, so it's essential to understand how the new lease standards relate to your business entity. 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