The adoption of ASC 842, Leases, is a change for companies in that it requires most leases to be recognized on the balance sheet, but the guidance also includes expanded disclosure requirements.

Many companies designed a process to identify embedded lease arrangements and then focused on applying the ASC 842 transition requirements to this complete population of leases. As such, companies may not have had the opportunity to consider the requirements past the accounting entries for transition and plan for the expanded disclosure requirements within ASC 842.

Note: For a full example of accounting for an operating lease under ASC 842, click here.

A focus on quantitative disclosures for lessees

In this blog, we’ll provide an overview of the new disclosures and also demonstrate how to accumulate the necessary supporting data for a company’s annual disclosures. Note: While ASC 842 only requires certain lessor disclosures to be made in all interim financial statements, SEC guidance requires companies to supplement its interim disclosures with annual disclosures in each quarterly report in the year of adoption, to the extent they are not duplicative with other disclosures. Therefore, public companies should consider the nature of the lease disclosures that should be included in the quarterly reports in the transition year.

These disclosure requirements for lessees include qualitative discussion on the lease arrangements, a description of significant judgments made in applying ASC 842 to the lease population, and also include expanded quantitative disclosures about the amounts recognized in the financial statements relating to the lease population. We’ll focus on the expanded quantitative disclosures.

Lease Accounting Guide

Why software makes generating disclosures more accurate and efficient

Without assistance from an ASC 842 software provider, compiling the supporting data for the quantitative disclosures can be a time consuming task for a company. Additionally, the company would then have to validate the accuracy of the spreadsheet calculations for its internal control requirements and for its auditors. Additionally, these calculations would need to be updated on an ongoing basis for any modifications or lease additions/terminations during the period.

LeaseQuery’s reporting studio includes an ASC 842 Complete Disclosures Report that can be generated for the entire organization. This allows a company to quickly aggregate the data for the required disclosures in accordance with ASC 842 to be disclosed in a company’s lease footnote. The guidance does not require a specific format of these disclosures; but the examples within ASC 842 present the information in a tabular format. LeaseQuery has established its reporting in a similar tabular format.

This video demonstrates how easy it is to run the complete listing of disclosures required under ASC 842 in LeaseQuery. The listing can be exported to Excel and allow an easy copy/paste exercise to populate a company’s footnotes.

Complete Disclosures Report gif

Looking at quantitative disclosures in four “buckets”

The quantitative disclosures required under ASC 842 can be considered in four buckets – Lease Costs, Other Information, Weighted Averages, and Maturity Analysis.

Lease costs

Lease costs are the total costs attributable to entering into a lease agreement – otherwise known as the expense. This is the sum of the fixed and variable considerations within a contract. ASC 842 requires disclosures of cost related to operating and finance lease expense, and also disclosure of lease expense for companies that have elected the practical expedient to treat short-term leases similar to ASC 840 accounting requirements.

To the extent that a company’s lease agreements include variable lease expense, the annual cost should be disclosed. And, if a company has entered into any sub-lease arrangements, the income on these arrangements should be disclosed. The net of these transactions results in annual consolidated lease cost.

ASC 842 includes an example to illustrate the quantitative disclosure requirements. This is an excerpt of the portion related to lease cost:

ASC 842 Example Lease Cost

The Complete Disclosure Report generated by LeaseQuery earlier can be exported into Excel and used as the basis for the quantitative disclosures. See below for the excerpt related to lease cost:

ASC 842 Lease Cost in Excel

In our experience, most companies will elect the practical expedient to not disclose comparative information within its financial statements and will instead adopt ASC 842 on the transition date. However, if a company has chosen to present comparative information, this is configured during the company’s set-up of LeaseQuery, and these reports would be configured to generate comparative financials upon transition.

In addition to the summary level information, the LeaseQuery software allows the ability to drill down into each disclosure individually. This allows users to perform reconciliations of the balances disclosed in the financials. This video demonstrates how additional details can be reviewed for the Amortization of ROU Assets – Finance Leases. For example, the $549,749.50 presented on the Complete Disclosure report agrees to the total balance in the Amortization of ROU Assets – Finance Lease report.

Amortization of Right of Use Asset

Other information

Other information presents cash flow and supplemental non-cash information related to lease liabilities to facilitate an investor to understand the cash flows and operations of the business.

ASC 842 requires a lessee to disclose cash paid for amounts included in the measurement of lease liabilities, segregated between operating and financing cash flows. This translates into a requirement to disclose the consolidated balance of operating cash flows for all finance and operating leases and also the financing cash flows from finance leases.

For each operating lease, lessees will disclose the operating cash flows as the sum of the liability reduction recognized over 12 months; which is the difference between the cash the lessee pays and the expense recognized. For each finance lease, lessees will disclose the operating cash flows from finance leases as the sum of the liability reduction booked over 12 months. The lease expense recognized during the annual period for the finance lease will be disclosed as the financing cash flows from finance leases.

LeaseQuery makes the compilation process for this disclosure simple by accumulating the applicable amounts for all leases within the portfolio and summarizing this information in the disclosure report.

ASC 842 requires a lessee to disclose supplemental noncash information about lease liabilities arising from obtaining ROU assets. The Complete Disclosure Report in LeaseQuery will summarize noncash changes to ROU assets and lease liabilities to facilitate a company’s disclosures.

To the extent that a company has entered into sale leaseback transactions, the gain/loss from this transaction must be calculated by the company and presented in the footnote.

This is an excerpt from the guidance:

ASC 842 Gain Loss Example

This is a screenshot of the Complete Disclosure report extracted from LeaseQuery:

ASC 842 Complete Disclosure Report

Weighted averages

Weight-Averages may be the most difficult and confusing disclosure to capture under the new lease accounting standard. As such, companies will find it very helpful to choose a reliable software that not only provides the disclosure for ease of use, but the software provider also understands the accounting behind the disclosure.

ASC 842 indicates that, aggregated for both operating and finance leases, a lessee should calculate the weighted-average remaining lease term based on the remaining lease term and the lease liability balance for each lease as of the reporting date. To calculate this disclosure, a lessee will collect the lease liability balance for each lease at year-end, and also the remaining lease term. The lessee should multiply each lease liability balance by the corresponding lease term. The sum of this amount is divided by the sum of the lease liability at year-end to arrive at the weighted-average lease term.

ASC 842 requires the lessee calculate the weighted-average discount rate based on the discount rate for the lease that was used to calculate the lease liability balance for each lease as of the reporting date and the remaining balance of the lease payments for each lease as of the reporting date. This disclosure is required to be disclosed separately for operating and financing leases. To calculate this disclosure, a lessee should, on a lease-by-lease basis, multiply the remaining payments by the discount rate. This amount is divided by the sum of remaining payments, resulting in the weighted-average discount rate.

This is an excerpt from the guidance:

ASC 842 Weighted Average Guidance

This is a screenshot of the Complete Disclosure report extracted from LeaseQuery:

ASC 842 Weighted Average Example

Maturity analysis

The Maturity Analysis shows an annual projection of the undiscounted cash flows over a five-year period and all remaining years after that.

This is an excerpt from the ASC 842 guidance on the requirements for the maturity analysis disclosure:

Maturity Analysis for Finance Leases

LeaseQuery summarizes the maturity analysis information to facilitate disclosure. Here is an example of finance leases within the population (click the image to view a larger version):

ASC 842 Disclosure Example in Excel

Wrap-up

Use of a software provider will facilitate the preparation of a company’s lease disclosures and ensure the accuracy of the information disclosed. This will allow the company to focus its efforts on the qualitative requirements of the disclosure, such as description of its leases, features of lease arrangements such as variable lease payments, and residual value guarantees, and its accounting policies with regards to discount rates, lease/non-lease elements, and short term leases.

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