The adoption of Accounting Standards Codification (ASC) 842, Leases, makes accounting much more complex for traditional operating leases. Not surprisingly, the disclosure requirements are quite extensive. Additionally, the new leases standard has specific requirements as to how leasing activity is to be presented in the basic financial statements.
Statement of financial position
ASC 842 requires each type of lease, operating or finance type, to be displayed in the statement of financial position. The related right to use asset must be presented separately from other assets, as well as from each other. The corresponding lease liabilities also must be presented separately from other liabilities and from each other.
The classification of the assets and liabilities as current or noncurrent will be subject to the same considerations as other assets and liabilities.
If an entity chooses not to provide the display noted above, the entity may disclose which line items in the statement of financial position contain the related assets and liabilities for operating leases and finance type leases, and the relevant balances.
An entity is prohibited from combining the assets and liabilities of the different types of leases in the same line item.
Statement of comprehensive income
There are no substantive changes from current practice related to display in this statement. For finance type leases, the related interest expense need not be separately stated and the amortization of the right to use asset may be combined with other amortization expense.
The rent expense from operating leases needs to be included in the income from continuing operations.
Statement of cash flows
Repayments of the principle portion of finance leases are classified as financing activities and related interest expense is classified in the same manner as interest paid as required in Topic 230. Operating lease payments are classified within operating activities, except for expenditures to make the asset ready for use – such as moving and related set up costs, which should be classified as investing activities. Related variable lease payments and payments related to short term leases will be classified in operating activities.
The overall objective of the disclosure requirements is to enable users of the financial statements to understand the “…amount, timing, and uncertainty of cash flows arising from leases.”1 A lessee will need to disclose quantitative and qualitative information about its leases, the related significant judgments made in measuring leases and the amounts recognized in the financial statements. An entity needs to consider the required level of detail to meet this objective, including the extent of aggregation or disaggregation used in the disclosures.
Although ASC 842 is considered to be a principle based standard there are specific required disclosures as follows:
a) Information about the nature of its leases, including:
b) A lessee should identify the information relating to subleases included in the disclosures provided in (a.1) through (a.5), as applicable.
c) Information about leases that have not yet commenced but that create significant rights and obligations for the lessee, including the nature of any involvement with the construction or design of the underlying asset.
d) Information about significant assumptions and judgments made in applying the requirements of this Topic, which may include the following:
Total lease cost
An entity shall also disclose information related to its total lease cost, including amounts recognized in the income statement and costs capitalized related to leases and the related cash flows. This is accomplished by providing the following disclosures:
Future lease payment requirements
A lessee must also disclose the future lease payment requirements, undiscounted, for the first five years and the total for the remaining lease term. This requirement, of course, is a requirement of the current lease standard.
If relevant, a lessee will separately disclose its lease transactions with related parties and information related to its short term leases commitments. If an entity elects the practical expedient for not separately accounting for nonlease components in a lease contract, this policy and information for which classes of assets the election has been made must be disclosed.
The new disclosure requirements will potentially require new process and controls, especially related to the accounting for operating leases. ASC 842, provides an example of how the quantitative disclosure could be displayed in Example 6, ASC 842-20-55-4. Examples of related qualitative disclosures are not provided.
Entities will need to consider how and in what format the required information should be provided, possibly using its current lease footnote as a starting point and building from there. The disclosures are subject to audit and, for issuers, will be in scope for management’s report on internal controls.
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1 ASC 842-20-5--1
2 ASC 842-20-50-3
3 ASC 842-20-5-4