On July 30, 2018, the Financial Accounting Standards Board issued revisions to Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842). The revisions address concerns that the original ASU creates hardship and ultimately expense for:
- Entities and their auditors who prepare comparative financial statements, and
- Lessors who, under the original ASU, are required to separate components of leasing agreements and recognize the different components according to applicable guidance. This separation of components could result in certain components of the lease agreement being recognized under the accounting guidance for leases and other components being recognized under the accounting guidance for revenue for contracts with customers or other guidance.
ASU No. 2018-11, Leases (Topic 842): Targeted Improvements aims to alleviate these concerns with the following two options:
- An option to apply the transition provisions of the new standard at the effective date instead of at the earliest comparative period presented in an entity’s financial statements.
- Those who elect this option will not adjust comparative period financial information for the effects of ASC 842, nor will they make the new required lease disclosures for periods before the effective date.
- At the effective date, they will recognize right-of-use assets, lease liabilities and a cumulative-effect adjustment to the opening balance of retained earnings.
- They will carry forward their ASC 840 disclosures (the lease standard in effect prior to ASC 842) for comparative periods.
- A practical expedient permitting lessors to not separate non-lease components from the associated lease component if certain conditions are met. This applies to lessors with contracts that contain both lease and non-lease components*.
- Effective date coincides with the effective date of the new leases standard for companies that have not already adopted the original ASU.
- For companies that have already adopted the ASU, the date is effective upon issuance, but can only be adopted by companies either at (1) the beginning of the company’s first reporting period after issuance or (2) the company’s mandatory ASC 842 effective date.
In the FASB news release issued July 30, FASB Chairman Russell G. Golden said “The targeted improvements in the ASU address areas our stakeholders identified as sources of unnecessary cost or complexity in the leases standard. They represent the FASB’s commitment to proactively address implementation issues raised by our stakeholders to ensure a successful transition to the new standard without compromising the quality of information provided to investors.”
Smith & Howard is working with our clients who are potentially impacted by this ASU to ensure these optional provisions are addressed. If you have any questions about the implementation of this ASU, please contact Karl Briem at 404-874-6244 or simply fill out the contact form below.
* Non-lease components include goods and services provided by the lessor to the lessee that are separate from the right to use the leased asset. Examples include maintenance on lease equipment or security, among many others.