The FASB just released an important update, ASU 2019-01, that simplifies the implementation process to ASC 842. The updates are based on learning from companies that have transitioned to the new standard. Here’s what you need to know:

Issue 1: Determining the Fair Value of the Underlying Asset by Lessors That Are Not Manufacturers or Dealers

Who: Lessors that are not manufacturers or dealers

What was: ASC 842 originally required all lessors to determine the fair value of leased assets using the Topic 820 Fair Value definition.

What now: ASC 842 reintroduces the ASC 840 Fair Value exception, in which lessors will measure fair value, at lease commencement, as cost, reflecting any applicable volume or trade discounts.

NOTE – If a “significant” lapse in time exists between a lessor’s acquisition date of an asset and the subsequent lease commencement date, the standard requires the lessor to use the Topic 820 Fair Value definition for this asset.

Issue 2: Presentation on the Statement of Cash Flows—Sales-Type and Direct Financing Leases

Who: Lessors within the Scope of ASC 942 [Financial Services]

What was: ASC 842 originally required all lessors to recognize principal payments received from sales-type and direct financing leases in the Operating Activities section of the Statement of Cash Flows.

What now: For affected lessors, the lessor will recognize principal payments received from sales-type and direct financing leases in the Investing Activities section of the Statement of Cash Flows.

NOTE – This clears up conflicting guidance, in which an illustrative example within Topic 942 provides a basis for lessors to recognize principal payments from sales-type and direct financing leases as Investing Activities

Issue 3: Transition Disclosures Related to Topic 250, Accounting Changes and Error Corrections

Who: All entities

What was: ASC 842 originally only excluded annual disclosure requirements related to ASC 250-10-50-1.

What now: Entities do not need to provide transition disclosures for interim periods during the year of ASC 842 adoption, which include the following from Topic 250:

a) Income from continuing operations
b) Net income (or other appropriate captions of changes in the applicable net assets or performance indicator)
c) Any other affected financial statement line item
d) Any affected per-share amounts

NOTE – The FASB did not originally intend for entities to report on these disclosures during the interim periods of the adoption year; however, the updated guidance provides explicit clarity regarding this subject.

Read the full update here.

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