15.1 Background and Objective
The disclosure objective of ASC 842 is to “enable users of financial statements
to assess the amount, timing, and uncertainty of cash flows arising from leases.”
Accordingly, disclosures (both qualitative and quantitative) are intended to
supplement the amounts recorded in the financial statements so that financial
statement users can better understand the nature of an entity’s leasing activities
from the standpoint of both lessees and lessors.
The Board has emphasized that entities need to remain focused on the underlying
disclosure objective so that they avoid obscuring useful information by providing
extraneous detail or losing relevance by furnishing significantly aggregated
information. Further, a “one-size-fits-all” approach would be inconsistent with the
disclosure objective of ASC 842; thus, to meet this objective, it is critical that
an entity use significant judgment and evaluate these requirements against its own
leasing activities.
Throughout ASC 842, the FASB consistently uses the word “shall” to indicate that
an entity would generally be required to provide a specific disclosure. However, in
paragraph BC276 of ASU 2016-02, the
FASB acknowledges that an entity needs to consider both relevance and materiality
when determining which disclosures to provide:
The Board also
rejected including an explicit statement that the disclosure requirements are
not required in all circumstances. That is because it is implicit to the overall
disclosure objective that the level of detail in the disclosures should equate
to the significance of an entity’s leasing activity (for example, if leasing is
a significant part of an entity’s business activities, the disclosures would be
more comprehensive than for an entity whose leasing activities are less
significant to its business activities).
For example, a lessee would most likely not discuss judgments and
assumptions used to allocate consideration in a contract between lease and nonlease
components if there are no nonlease components or if management concludes that the
quantitative and qualitative impact of the disclosure requirement is immaterial.
However, as with other materiality assessments, entities should carefully consider
whether the omission of a required disclosure represents an error. Entities are
encouraged to consult with their financial advisers when making such
determinations.
Further, while the disclosures specified in ASC 842 are generally viewed as
mandatory, how an entity complies with these disclosure requirements may vary
significantly. An entity should assess which disclosures need to be provided for
each reporting period since a disclosure deemed irrelevant or immaterial in previous
reporting periods may subsequently become material (e.g., as a result of increases
in the monetary values to be disclosed or changes in qualitative factors).
Although the SEC staff has thus far issued relatively few comments
on the application of ASC 842, the staff has made certain observations related to
this topic. For example, registrants have received comments on (1) how ASC 842
applies or does not apply in certain arrangements and (2) the discount rate used to
calculate the amount of the lease liability and corresponding ROU asset. Other
topics addressed in SEC staff comments on ASC 842 include, but are not limited to,
the nature of expenses treated as initial direct costs; the determination of lease
classification; accounting for leasehold improvements, including amortization;
impairment considerations related to ROU assets; and the application of the
sale-and-leaseback accounting requirements in ASC 842-40. For further details about
the staff’s observations on each of these topics, see Deloitte’s Roadmap SEC Comment Letter Considerations,
Including Industry Insights.
As regulators review disclosures and issue comments, entities should evaluate their
peers’ filings and look for opportunities to improve existing disclosures. We
encourage such continual improvement and remind preparers to focus on the disclosure
objective stated above.
This chapter is divided into the following overall subsections: