Financial Statement Disclosure

ASC 842 requires lessees and lessors to provide additional information about their leases. This includes making significant judgments on how to account for leases and the amounts to be recognized on the financial statements. The goal of the disclosures is to enable users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.

The following are some of the quantitative and qualitative disclosures that will be required under the new lease standard.

For the LESSEE

• Information about the nature of its leases
• Maturity analysis of lease liabilities
• Lease expense, split between operating and finance leases
• Short-term lease expense
• Variable lease expense
• Sublease income
• Weighted average remaining lease term
• Weighted average discount rate

For the LESSOR

• Information about the nature of its leases
• Maturity analysis of lease investments
• Profit or loss recognized at lease commencement (for sales-type leases)
• Lease income
• Qualitative and quantitative information about significant changes in residual values of leased assets

Transition Disclosures

Additionally, the new lease standard requires companies to use a modified retrospective approach. In other words – companies not only have to do things differently in the future, but also for past comparative periods. 

The new standard also provides certain “practical expedients” companies may elect at the date of transition to ease the burden of adoption. These practical expedients would permit companies to not reassess at the date of initial adoption:

1. Whether any expired or existing contracts are or contain leases.
2. The lease classification for any expired or existing leases. (All existing leases that were classified as operating leases in accordance with Topic 840 will be classified as operating leases and all existing leases that were classified as capital leases in accordance with Topic 840 will be classified as finance leases.)
3. Initial direct costs for existing leases.

A fourth practical expedient would allow an entity to use hindsight in:

• Determining the lease term when considering lessee options to extend or terminate the lease and to purchase the underlying asset; and
• Assessing ROU assets for impairment.

The first three practical expedients must be elected together (i.e., all or none). In contrast, the fourth practical expedient may be elected separately; however, if elected, it must be treated as an accounting policy election. It cannot be elected on a lease-by-lease basis.

For companies that avail themselves of the practical expedients, the primary effect of adoption will be the grossing up of the balance sheet for any existing operating leases.