The FASB just released some clarification to ASC 842. If you’ve been following closely, then you know that the standards have created some nuances that require further clarification. These updates provide that clarification and address sixteen issues. Our Lease Accountants have read the update and included a summary of the first three issues below:

Issue 1: Residual Value Guarantees

Summary: This corrects an incorrect reference that paragraph 460-10-60-32 refers to guidance around sale-leaseback-sublease transactions when it should have been about guarantees by a seller-lessee of the underlying asset’s residual value in a sale leaseback transaction.

Issue 2: Rate Implicit in the Lease

Summary: A rate implicit in the lease of zero should be used when applying the definition of the term rate implicit in the lease results in a rate that is less than zero.

Issue 3: Lessee Reassessment of Lease Classification

Summary: Topic 842 is clear that lease classification should be reassessed at the effective date of the modification, and the classification will be dependent on the modified conditions and terms along with the facts and circumstances existing at the modification date. Topic 842 also requires a lessee to reassess lease classification if there is a change in the lease term or the assessment of a lessee option to purchase the underlying asset. There was confusion whether the lessee should reassess lease classification based on the facts and circumstances existing as of the date the reassessment.

At LeaseQuery, we’re dedicated to providing updates on new standards as they become available. We will continue to provide more in-depth analysis in the coming weeks on these codifications.

If you are interested in these updates you will also be interested in our Step-by-Step Lease Accounting Transition Step Guide for FASB 842 and IFRS:

Lease Accounting Guide

Please feel free to read the full language on all sixteen of clarifications in the Financial Accounting Standards Board’s official Codification Improvements to Topic 842, Leases here.