On December 19, 2018, the FASB issued a proposed Accounting Standards Update (ASU),¹ which would provide Codification improvements to ASC 842² related to the following two issues:

• Determining the fair value of the underlying asset by lessors that are not manufacturers or dealers.
• Statement of cash flows presentation for sales-type and direct financing leases by lessors within the scope of ASC 942.

These issues were discussed at the Board’s December 4, 2018, meeting. See Deloitte’s December 7, 2018, journal entry for more information.

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

The proposed ASU provides guidance for determining fair value and its application to lease classification and measurement for lessors who are not manufacturers or dealers (qualifying lessors). Specifically, for qualifying lessors, the fair value of the underlying asset at lease commencement would be its cost, including any acquisition costs, such as sales taxes and delivery charges. However, if a significant lapse of time occurs between the acquisition of the underlying asset and lease commencement, lessors would be required to determine fair value in accordance with ASC 820.

Connecting the Dots The proposed guidance is similar to the fair value exception that was provided under ASC 840-10-55-44 for qualifying lessors. As such, we would not expect a significant change in how most lessors determine the fair value of underlying assets when transitioning from ASC 840 to ASC 842.

Statement of Cash Flows Presentation for Sales-Type and Direct Financing Leases by Lessors Within the Scope of ASC 942

ASC 842-30-45-5 requires lessors to classify cash receipts from leases within “operating activities.” The proposed ASU would require depository and lending lessors within the scope of ASC 942 to classify principal payments received from sales-type and direct financing leases within “investing activities.”

Transition and Effective Date

The Board tentatively decided that the effective date of the proposed ASU would be as follows:

• For public business entities, certain not-for-profit entities, and certain employee benefit plans, for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.
• For all other entities, for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.

Early adoption would be permitted for all entities. The proposed amendments would be applied on the date the entity first applied ASU 2016-02³ in accordance with ASC 842-10-65-1(c).

Next Steps

Comments on the proposed ASU are due by January 15, 2019.

Questions for Respondents

The proposed ASU’s questions for respondents are reproduced below for reference.

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

Question 1: Should a lessor that is not a manufacturer or dealer establish fair value of the underlying asset as its cost, subject to any trade or volume discounts that apply (acknowledging that if a significant lapse of time occurs between the acquisition of the underlying asset and lease commencement, the definition of fair value must be used)? If not, please explain why.

Question 2: Are the proposed amendments operable? If not, please explain why.

Question 3: Would the proposed amendments result in a reduction of decision-useful information to users of financial statements? If so, please explain why.

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

Question 4: Should lessors that are depository and lending institutions present “principal payments received under sales-type leases and direct financing leases” in investing activities? If not, please explain why.

Question 5: Are the proposed amendments operable? If not, please explain why.

Question 6: Would the proposed amendments result in a reduction of decision-useful information to users of financial statements? If so, please explain why.

Effective Date and Transition

Question 7: Should the effective date for all lessors within the scope of the proposed amendments be for fiscal years beginning after December 15, 2019, with early application permitted? If no, what effective date should be established and why?

Question 8: Should the proposed amendments be applied at the date that an entity first applied Topic 842 using the same transition methodology in accordance with paragraph 842-10-65-1(c)? If not, please explain why.

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1 FASB Proposed Accounting Standards Update, Leases (Topic 842): Codification Improvements for Lessors.

2 For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s “Titles of Topics and Subtopics in the FASB Accounting Standards Codification.”

3 FASB Accounting Standards Update No. 2016-02, Leases.