On March 5, 2019, the FASB issued ASU 2019-01, Leases (Topic 842): Codification Improvements, which amends certain aspects of the Board’s new leasing standard, ASU 2016-02.¹ ASU 2019-01 is the result of a proposed ASU² issued in December 2018. The ASU addresses 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 942.³
• Clarification of interim disclosure requirements during transition.

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

The 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.

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

The ASU requires 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.”

Effective Date and Transition

For the two issues above, the ASU is effective:

• 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 is permitted for all entities. If an entity early adopts, the ASU will be applied as of the date the entity first applies ASU 2016-02 (i.e., when it adopts the new leasing standard in accordance with ASC 842-10-65-1(c)).

Connecting the Dots Since the amendments in the ASU are similar to the guidance provided under ASC 840 for qualifying lessors, the FASB’s intent is to preserve existing practice for such lessors when transitioning from ASC 840 to ASC 842. We expect most entities to early adopt the ASU as of the initial application of ASU 2016-02.

Clarification of Interim Disclosure Requirements During Transition

The ASU also includes a Codification improvement to the transition guidance in ASC 842-10-65-1(i) to clarify that entities adopting ASC 842 do not need to provide the interim-period disclosures required by ASC 250-10-50-3, which states:

In the fiscal year in which a new accounting principle is adopted, financial information reported for interim periods after the date of adoption shall disclose the effect of the change on income from continuing operations, net income (or other appropriate captions of changes in the applicable net assets or performance indicator), and related per-share amounts, if applicable, for those post-change interim periods.

Accordingly, interim disclosures about the effect on income in the year of adoption of ASC 842 are excluded from the required disclosures in transition, in a manner similar to the annual disclosures in ASC 250-10-50-1(b)(2).

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1 FASB Accounting Standards Update (ASU) No. 2016-02, Leases.

2 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.

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