1.2 Overview
ASC 842-10
05-1 The Leases Topic includes the following Subtopics:
- Overall
- Lessee
- Lessor
- Sale and Leaseback Transactions
- Leveraged Lease Arrangements
05-2 The Subtopics listed in paragraph 842-10-05-1 establish the requirements of financial accounting and
reporting for lessees and lessors.
10-1 This Topic specifies the
accounting for leases. An entity should consider the terms
and conditions of the contract and all relevant facts and
circumstances when applying this Topic. An entity should
apply this Topic consistently to leases with similar
characteristics and in similar circumstances.
10-2 The objective of this Topic is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease.
The most significant change in ASU 2016-02 is its lessee model that brings most leases on the balance sheet. The ASU also addresses other concerns related to the lessee accounting model in ASC 840. For example, it eliminates the required use of bright-line tests for determining lease classification, thus eliminating a potential source of structuring. Furthermore, ASU 2016-02 aligns certain of the underlying principles of lessor accounting with those in ASC 606, the FASB’s revenue standard (e.g., up-front profit recognition through a sales-type lease is governed by whether control of the underlying asset is transferred to the lessee at lease commencement). The ASU also requires lessors to provide more transparent information about their exposure to the changes in the value of residual assets as well as how they manage that exposure.
The structure of the guidance in ASC 842 is depicted in the graphic below. This Roadmap is designed with this structure in mind.
ASU 2016-02 is effective for (1) public companies in periods beginning after
December 15, 2018; (2) certain public NFPs2 in periods beginning after December 15, 2019; and (3) all other
entities in periods beginning after December 15, 2021 (because of the
deferral in ASU 2020-05, which was issued in June 2020). It represents
a wholesale change to lease accounting; as a result, many entities
have faced significant implementation challenges during the periods
leading up to the effective date and beyond.
Footnotes
2
The deferral provided by ASU
2020-05 applies to public NFPs
that have not issued financial statements or made
financial statements available for issuance as of
June 3, 2020. Public NFPs that have issued
financial statements or have made financial
statements available for issuance before that date
must comply with the effective dates prescribed
for public companies above.