At its February 13, 2019, meeting, the FASB concluded deliberations on its December 2018 proposed Accounting Standards Update (ASU)¹ related to Codification improvements to ASC 842.² In addition, after discussing comments raised by stakeholders on issues not included in the proposed ASU, the Board tentatively decided to add a Codification improvement on interim disclosure requirements in transition to the new leasing standard. This journal entry includes a summary of the tentative decisions reached and related discussion at the meeting for the following 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.
• Additional issues raised in comment letters.

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 that 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. At the February 13, 2019, meeting, the Board tentatively affirmed its decision in the proposed ASU related to this issue.

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

The Board also tentatively affirmed its decisions in the proposed ASU to 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.” That is, such entities would not follow the guidance in ASC 842-30-45-5, which requires lessors to classify cash receipts from leases within “operating activities.”

Connecting the Dots The proposed ASU for the two issues above is similar to the guidance provided under ASC 840 for qualifying lessors. Therefore, the proposed ASU is intended to preserve existing practice for such lessors when transitioning from ASC 840 to ASC 842.

Transition and Effective Date

The Board tentatively affirmed 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 2016-02, Leases, in accordance with ASC 842-10-65-1(c).

Additional Issues Raised in Comment Letters

The Board also deliberated on three issues that were raised in certain comment letters unrelated to the proposed ASU. The Board tentatively decided that two of the issues required no further action. The third issue relates to the transition guidance on interim disclosure requirements. ASC 842-10-65-1(i) requires an entity to apply ASC 250 disclosure requirements except for the disclosure in ASC 250-10-50-1(b)(2), which addresses the annual effect of a change in accounting principle (e.g., the adoption of ASC 842) on income from continuing operations, net income, and other affected amounts for the current period. However, the transition guidance in ASC 842 does not explicitly exclude the similar interim period disclosure requirements noted in ASC 250-10-50-3. That is, while annual disclosures about income in the year of adoption of ASC 842 are excluded from the scope of the new leasing standard’s transition guidance, related interim disclosures do not have a similar exclusion.

The Board tentatively decided to make a Codification improvement to the transition guidance in ASC 842, as part of the proposed ASU discussed above, to clarify that entities adopting ASC 842 do not need to provide the interim-period disclosures required by ASC 250-10-50-3.

Next Steps

The Board directed the staff to draft a final ASU for a vote by written ballot.

See the meeting handout and the summary of tentative Board decisions for additional information.

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1 FASB Proposed Accounting Standards Update, Codification Improvements for Lessors. For a summary of the Board discussion and proposed ASU, see Deloitte’s December 7, 2018, and December 21, 2018, journal entries.

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