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FASB Clarifies Implementation Guidance And Disclosure Requirements In Leases Standard

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The FASB recently released its first Accounting Standards Update of 2019, ASU 2019-01 Leases (Topic 842) Codification Improvements. This ASU was released with the intent of clarifying conflicting or unclear guidance within the new leases standard that will be implemented under ASU 2016-02, Leases (Topic 842). 
April 1, 2019

The FASB recently released its first Accounting Standards Update of 2019, ASU 2019-01 Leases (Topic 842) Codification Improvements. This ASU was released with the intent of clarifying conflicting or unclear guidance within the new leases standard that will be implemented under ASU 2016-02, Leases (Topic 842). There were three main issues noted for which clarification was provided:

  1. For lessors who are not manufacturers or dealers, which generally include financial institutions and captive finance companies, there exists an exception under current lease guidance that allows these companies to determine the fair value of leased property as the underlying asset’s cost, reflective of any volume or trade discounts instead of fair value guidance under ASC Topic 820 Fair Value Measurements. This exception was eliminated within ASC 842. ASU 2019-01 restores this exception as long as significant time does not lapse between the acquisition of the leased property and the lease commencement.

  2. Under ASC 840, there was no definitive guidance on cash flow statement treatment for how principal payments should be reported by lessors for sales-type and direct financing leases. Many financial services institutions had been presenting the principal payments within investing activities based on guidance in ASC 942. ASC 842 originally required cash receipts from leases to be presented in operating activities for all lessors. ASU 2019-01 clarifies that the guidance under ASC 942 should continue to be followed for those financial services institutions included under ASC 942 as it relates to the treatment of principal payments received on the statement of cash flows.

  3. ASC 842 required entities to provide transition guidance in relation to the change in accounting principle except for specific disclosures for the effect of the change in accounting principle on annual periods including current and prior annual periods retrospectively adjusted in relation to (1) income from continuing operations, (2) net income, (3) any other affected financial statement line item, and (4) any affected per-share amounts. A similar exception was not provided in ASC 842 in relation to interim period disclosures which created confusion for the first quarter presented in the year of adoption. ASU 2019-01 creates an exception for the interim period presentation consistent with the exception for annual periods.

The amendments in ASU 2019-01 affect the amendments in ASU 2016-02, which are not yet effective but can be early adopted. The effective date and transition requirements for the amendments in ASU 2019-01 for entities that have not adopted Topic 842 before the issuance of ASU 2019-01 are the same as the effective date and transition requirements in ASU 2016-02. For public business entities, the effective date is for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other entities, the effective date is for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. 

The full text of ASU 2019-01 is available here.

 

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