More Insights from Brett Sinsabaugh, CPA, CCA. THE FASB WILL ISSUE A FORMAL PROPOSAL FOR PUBLIC COMMENT BEFORE FINALIZING THE NEW EFFECTIVE DATES OF ANNUAL FINANCIAL REPORTING PERIODS BEGINNING AFTER DECEMBER 15, 2020. A lessor shall disclose any lease transactions between related parties. Guide to auditing the implementation of ASC 842, Leases | 1 . ASC 842 contains new and expanded lease disclosure requirements that are significantly more comprehensive and complex than before. Main differences are: • Timing of recognition for variable payments • Disclosure … As we have seen so far, the adoption of ASC 842 makes accounting much more complex for traditional operating leases. Other differences between the previous leases guidance and Topic 842 are described below. However, this is about to change under the new lease accounting standard (ASC 842). Lease Accounting Example – ASC 842 Accounting Lease Standards and PeopleSoft Lease Administration ; November 14, 2017 ; Steven Brenner ; Blog; Deep Dive Blog Series: Part 2 of 5. A lessor shall disclose information about how it manages its risk associated with the residual value of its leased assets. Revenue recognized is the lesser of: The fair value of the underlying asset at the commencement date or the sum of the lease receivable and any lease payments prepaid by the lessee. standards, ASC 840 (previously FAS 13) and IAS 17, respectively, since 2006 . A lessor shall either present in the statement of comprehensive income or disclose in the notes income arising from leases. Auditing Accounting Estimates under AS 2501 (Revised), Information about the nature of its leases, Terms and conditions of sale-leaseback transactions, Lease transactions between related parties. Information about how a lessor manages residual value risk of its leased assets, including: Carrying amount of residual assets covered by residual value guarantees, Risk management strategy for residual assets, Any other means used by the lessor to reduce its residual asset risk. A lessor shall explain significant changes in the balance of its unguaranteed residual assets and deferred selling profit on direct financing leases. Under its core principle, a lessee will recognize right-of-use (“ROU”) assets and related lease liabilities on the balance sheet for all arrangements with terms longer than 12 months. What Construction Companies Should Consider When Implementing ASC 842, Accounting for Office Leases under ASC 842, FASB Reissues Targeted Improvements to Leases Standard. ASC 842, provides an example of how the quantitative disclosure could be displayed in Example 6, ASC 842-20-55-4. It can be used as a standalone ASC 842 Lease solution, or in conjunction with Leasing software. Table of lease income received during each annual and interim reporting period, including specific disclosures for sales-type, direct finance, and operating leases. 151 Le Gordon Drive, Suite 101 To date, there have not been a significant number of SEC comment letters related to leasing transactions under ASC 842. He also provides audit and business assurance services to privately-held businesses to clients in the manufacturing, retail and distribution, and technology industries, as well as employee benefit plan audits and not-for-profit organizations. The Basic 842Lease.com spreadsheet is designed to be very simple and user friendly. One of the key goals of ASC 842 is to ensure greater transparency in financial reporting by providing a more faithful representation of the rights and obligations arising from leases. In fact, some of the disclosure requirements are the same as what we just reviewed for lessee’s. Companies are now evaluating the reporting and economic implications of the new standard. Under Accounting Standards Codification (ASC) 842, Leases, lessees recognize assets and liabilities for most leases but recognize expenses in a manner similar to today’s accounting (ASC 840, Leases). Bottom line: don’t wait until the last minute to think about these increased disclosure requirements! Generally, when an entity adopts a significant new accounting standard, it would make appropriate disclosure regarding the impact of adoption. We provide detailed Q&As, examples and observations, as well as comparisons to legacy US GAAP, updated for continuing developments in practice. Brett’s client focus is primarily in the real estate and construction industry. Prior to ASC 842, most leases were not included on the balance sheet. Companies must apply these disclosure requirements when adopting the new credit losses standard. Posted on Apr 19, 2017 by Amounts segregated between those for finance and operating leases for the following items: Explanation of significant changes in the carrying amount of the lessor’s unguaranteed residual assets and deferred selling profit for net investments in sales-type and direct financing leases. . ... read more, In this post, we are highlighting the 2020 AICPA Conference on Current SEC and PCAOB Developments which, for the first time, was held virtually! ASC 842 and the International Accounting Standard Board's IFRS 16. In addition, we take no responsibility for updating old posts, but may do so from time to time. Although we are CPAs and have made every effort to ensure the factual accuracy of the post as of the date it was published, we are not responsible for your ultimate compliance with accounting or auditing standards and you agree not to hold us responsible for such. This standard is going to require numerous new disclosures, both quantitative and qualitative. Family, Executive & Entrepreneur Advisory Services, Assisted Living and Long-Term Care Facilities, Family, Executive & Entrepreneurial Advisory Services. KPMG illustrates SAB 74 example transition disclosures for adopting ASC 842. The standard will require entities to classify leases as either a finance, or operating lease based upon the contractual terms. For public companies, the ASU is effective for fiscal The quantitative disclosure requirements under IFRS 16 are similar to, but not identical to ASC 842. The objective of the disclosure requirements is to enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. To achieve that objective, a lessor shall disclose qualitative and quantitative information about all of the following: The significant judgments made in applying the requirements in this Topic to those leases, The amounts recognized in the financial statements relating to those leases. Updated Disclosure Requirements ASC 842 requires an entity to consider the level of detail necessary to satisfy the disclosure objective. From a quantitative perspective, ASC 842 requires lessors provide the following disclosures: The theme to the quantitative disclosures is making sure that the entity provides the users with more transparency into the amount of income earned by the lessor, as well as the type of income (e.g., profit recognized at commencement, interest income, lease income, and variable lease income). The lease components are accounted for in accordance with the new leases standard. Unlike IFRS ( as further discussed below), the FASB set out explicit qualitative disclosure requirements in ASC 842 because it viewed those disclosures as essential to allowing financial statement users to understand a lessee’s leasing activities. For some great illustrative examples of the new disclosure requirements under ASC 842, check out KPMG's Leases Handbook. Delay in Implementation of New Lease Standard? Lessees and lessors will be required to disclose both quantitative and qualitative information regarding its leases and the significant judgments made when applying ASC 842, as well as the amounts recognized in the financial statements related to leases. The disclosure requirement under ASC 842 includes a general description of the lease, information about any significant assumptions or judgements, information about the basis, terms and conditions on which the payments are made, a narrative disclosure about the bargain purchase or termination option, and any restrictions imposed by leases. This is now part II of a five-part series that I have devoted to the new lease accounting standards. We consult with business owners in the financial services, construction, real estate, manufacturing, retail & distribution industries and nonprofits on business turnaround strategies, financial modeling and forecasting, and strategic tax planning related to the impact of Coronavirus (COVID-19). A lessor shall consider the level of detail necessary to satisfy the disclosure objective and how much emphasis to place on each of the various requirements. Update: On Tuesday, April 21, 2020, the Financial Accounting Standards Board (“FASB”) issued an exposure draft of a proposed Accounting Standards Update that would grant a one-year effective delay for certain entities implementing the new lease and revenue recognition standards. IFRS 16 has a slightly different objective for lease disclosures as compared to ASC 842. Some other entities have until 2020 to make the change to meet this goal, certain presentation and requirements... 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