Chapter 15 — Disclosure
Chapter 15 — Disclosure
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:
15.2 Lessee Disclosure Requirements
ASC 842-20
50-1 The objective of the disclosure requirements is to enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. To achieve that objective, a lessee shall disclose qualitative and quantitative information about all of the following:
- Its leases (as described in paragraphs 842-20-50-3(a) through (b) and 842-20-50-7 through 50-10)
- The significant judgments made in applying the requirements in this Topic to those leases (as described in paragraph 842-20-50-3(c))
- The amounts recognized in the financial statements relating to those leases (as described in paragraphs 842-20-50-4 and 842-20-50-6).
50-2 A lessee shall consider the level of detail necessary to satisfy the disclosure objective and how much emphasis to place on each of the various requirements. A lessee shall aggregate or disaggregate disclosures so that useful information is not obscured by including a large amount of insignificant detail or by aggregating items that have different characteristics.
In addition to considering the above disclosure requirements for lessees, an entity that is both a lessee and lessor or engages in sale-and-leaseback transactions will need to review the lessor and sale-and-leaseback requirements separately (see Sections 15.3 and 15.4, respectively). Further, as noted in ASC 842-20-50-2, a lessee should consider the appropriate level of disclosure aggregation or disaggregation so that it avoids including “a large amount of insignificant detail or . . . aggregating items that have different characteristics.”
Illustrative Example — Disclosure Disaggregation
The following are examples of
ways a lessee may choose to disaggregate its
lessee disclosures:
The lessee disclosure requirements can be further subdivided into the following topics:
- Information about the nature of an entity’s leases (including subleases) (Section 15.2.1).
- General description of leases (Section 15.2.1.1).
- Basis and terms and conditions on which variable lease payments are determined (Section 15.2.1.2).
- Terms and conditions of options to extend or terminate leases (Section 15.2.1.3).
- Residual value guarantees (Section 15.2.1.4).
- Restrictions or covenants imposed by leases (Section 15.2.1.5).
- Leases that have not yet commenced (Section 15.2.2).
- Significant assumptions and judgments (Section 15.2.3).
-
Whether a contract contains a lease (Section 15.2.3.1).
-
Allocation of consideration in a contract (Section 15.2.3.2).
-
Discount rate (Section 15.2.3.3).
-
- Amounts recognized in the financial statements (Section 15.2.4).
- Finance lease cost (Section 15.2.4.1).
- Operating lease cost (Section 15.2.4.2).
- Short-term lease cost (Section 15.2.4.3).
- Variable lease cost (Section 15.2.4.4).
- Sublease income (Section 15.2.4.5).
- Net gain or loss from sale-and-leaseback transactions (Section 15.2.4.6).
- Cash paid for amounts included in measurement of lease liabilities (Section 15.2.4.7).
- Supplemental noncash information (Section 15.2.4.8).
- Weighted-average remaining lease term (Section 15.2.4.9).
- Weighted-average discount rate (Section 15.2.4.10).
- Maturity analysis of liabilities (Section 15.2.5).
- Lease transactions with related parties (Section 15.2.6).
- Practical-expedient disclosure related to short-term leases (Section 15.2.7).
- Practical-expedient disclosure related to not separating lease and nonlease components (Section 15.2.8).
15.2.1 Information About the Nature of an Entity’s Leases (Including Subleases)
ASC 842-20
50-3 A lessee shall disclose all of the following:
- Information about the nature of its leases, including:
- A general description of those leases.
- The basis and terms and conditions on which variable lease payments are determined.
- The existence and terms and conditions of options to extend or terminate the lease. A lessee should provide narrative disclosure about the options that are recognized as part of its right-of-use assets and lease liabilities and those that are not.
- The existence and terms and conditions of residual value guarantees provided by the lessee.
- The restrictions or covenants imposed by leases, for example, those relating to dividends or incurring additional financial obligations.
A lessee should identify the information relating to subleases included in the disclosures provided in (1) through (5), as applicable. . . .
The information that a lessee discloses about the nature of its leases should be
consistent with the disclosure objective of ASC 842 and generally is qualitative (e.g.,
the extent to which terms or conditions exist and a description of those terms or
conditions). As noted in ASC 842-20-50-3(a), a lessee should also consider providing such
disclosures for subleases when appropriate.
Below is a discussion of, and examples illustrating, each of the requirements in (1)–(5) of ASC 842-20-50-3(a) above.
15.2.1.1 General Description of Leases
ASC 842-20
50-3 A lessee shall disclose all of the following:
- Information about the nature of its leases, including:
-
A general description of those leases. . . .
-
ASC 842 does not explicitly define the phrase “general description of leases.”
This disclosure requirement is intentionally broad, and a lessee should consider the
level of detail it needs to provide to satisfy the disclosure objective as well as how
much emphasis to place on this and other disclosure requirements.
Illustrative Example — General Description of an Entity’s Leases
15.2.1.2 Basis and Terms and Conditions on Which Variable Lease Payments Are Determined
ASC 842-20
50-3 A lessee shall disclose all of the following:
- Information about the nature of its leases, including: . . .2. The basis and terms and conditions on which variable lease payments are determined. . . .
As discussed in Section 6.3, only some variable lease payments (those based on an index or rate) are included in the initial and subsequent measurement of a lessee’s lease liability and ROU asset. Because variable lease costs are treated in different ways, the determination of what type of variability exists within a lease contract and whether that variability is included in, or excluded from, the recognized lease liability is critical to understanding lease costs and to achieving the disclosure objective (i.e., to understanding the timing and uncertainty of the entity’s cash flows). Therefore, the terms and conditions that create, and expose the entity to, that variability provide the user with information about amounts that are not recorded in the balance sheet because variable lease payments not based on an index or rate are not included in the measurement of the ROU asset or lease liability.
Although it is not expressly required to do so, it may be helpful for an entity
to describe the sources of the variability in two separate groups: (1) amounts included
in the lease liability and (2) variability that is excluded. In addition, an entity must
explain the types of variability that exists in its contracts, and this explanation
should include a discussion of key terms and conditions. For example, an entity may
encounter variability because a retail store location’s rent is determined on the basis
of a percentage of its store’s sales. From that simple description, a user may
understand the direct relationship between the sales and the rent increases. Sometimes,
however, the variability may be more complex, in which case an entity may need to
provide additional explanation and align key financial metrics.
Illustrative Example — Basis and Terms and Conditions on Which Variable Lease Payments Are
Determined
Variable lease payments that
are based on an index or rate:
Variable lease payments not
based on an index or rate:
15.2.1.3 Terms and Conditions of Options to Extend or Terminate Leases
ASC 842-20
50-3 A lessee shall disclose all of the following:
- Information about the nature of its leases, including: . . .3. The existence and terms and conditions of options to extend or terminate the lease. A lessee should provide narrative disclosure about the options that are recognized as part of its right-of-use assets and lease liabilities and those that are not. . . .
The requirement to disclose terms and conditions related to options to extend or terminate leases
should increase the transparency of the lessee’s rights and obligations. This requirement is in line
with the disclosure objective because it allows users to more easily understand the future cash flows
expected to be incurred (i.e., extension) or eliminated (i.e., termination) if the entity elects these options.
The extent of such disclosures may depend on how integral a lease is to a business.
Illustrative Example — Terms and Conditions of Options to Extend or Terminate Leases
15.2.1.4 Residual Value Guarantees
ASC 842-20
50-3 A lessee shall disclose all of the following:
- Information about the nature of its leases, including: . . .4. The existence and terms and conditions of residual value guarantees provided by the lessee. . . .
The ASC master glossary defines a residual value guarantee as “[a] guarantee
made to a lessor that the value of an underlying asset returned to the lessor at the end
of a lease will be at least a specified amount.” As further discussed in Section 6.7, with respect to such a
guarantee, a lessee is only required to include the amounts whose payment is probable in
the measurement of the lease liability and ROU asset.
Therefore, as outlined above, a lessee must explain the existence and terms and conditions of any residual value guarantees associated with its leases (e.g., the full amount that a lessee has guaranteed under its leases). Providing such information is consistent with the disclosure objective since the lessee’s future cash outflows may be affected if an asset’s value at the end of the lease term is less than the residual value that the lessee has guaranteed for the lessor. To the extent that amounts have been deemed probable and have therefore been included in the lease liability, it may be appropriate for an entity to explain its determination of such amounts — in particular, the circumstances that may subsequently change the amount included in the liability or future amounts that will be owed to the lessor.
Illustrative Example — Residual Value Guarantees
15.2.1.5 Restrictions or Covenants Imposed by Leases
ASC 842-20
50-3 A lessee shall disclose all of the following:
- Information about the nature of its leases, including: . . .5. The restrictions or covenants imposed by leases, for example, those relating to dividends or incurring additional financial obligations. . . .
ASC 842-20-50-3(a)(5) requires lessees to disclose restrictions imposed by lease
agreements, such as those concerning dividends, additional debt, and further leasing.
The scope of this disclosure requirement includes more than just the cash flows directly
related to the lessee’s use of the underlying asset (i.e., the cash flows associated
with the expected rental payments for that use), and an entity may want to consider
whether the lease imposes other restrictions or covenants that constrain the entity’s
cash flows for other purposes (e.g., restricting the payment of dividends, restricting
the use of additional leases or other debt financing).
Illustrative Example — Restrictions or Covenants Imposed by Leases
15.2.2 Leases That Have Not Yet Commenced
ASC 842-20
50-3 A lessee shall disclose all of the following: . . .
b. Information about leases that have not yet commenced but that create significant rights and obligations for the lessee, including the nature of any involvement with the construction or design of the underlying asset. . . .
In complying with the requirement to disclose “[i]nformation about leases that have not yet commenced but that create significant rights and obligations for the lessee,” an entity is providing users with information that will affect the entity’s future cash flows as a result of leasing activities that would not yet appear on the balance sheet, in particular as a lease liability. The requirements specifically highlight disclosures related to two common circumstances: (1) a forward-starting lease and (2) a future lessee’s involvement in the “construction or design” of an asset that it will lease upon completion of construction at some future date (e.g., a build-to-suit arrangement).
A forward-starting lease is a lease whose inception precedes the time when the
asset is made available for use by the customer (i.e., lease commencement). As discussed
in Section 3.3, a
forward-starting lease may result from an arrangement that includes a front-loaded
substitution right such that when that substitution right expires, the customer and the
supplier will have an identified asset that they can use to assess whether the contract is
or contains a lease. Note that a lease amendment (that is accounted for as a modification)
that extends the term but involves the same asset is not a forward-starting lease while a
lease amendment that grants an additional right of use in the future (e.g., by adding a
new floor to an existing lease of office space) would be considered a forward-starting
lease.
As discussed in Chapter 11, there are specific recognition and measurement requirements that
apply when a future lessee is involved in the construction or design of an asset that it will lease in the
future. As a result of those requirements, the future lessee may need to recognize the asset during
the construction period and then assess the arrangement in accordance with the sale-and-leaseback
requirements outlined in Chapter 10.
Illustrative Example — Leases That Have Not Yet Commenced
15.2.3 Significant Assumptions and Judgments
ASC 842-20
50-3 A lessee shall disclose all of the following: . . .
c. Information about significant assumptions and judgments made in applying the requirements of this
Topic, which may include the following:
1. The determination of whether a contract contains a lease (as described in paragraphs 842-10-15-2
through 15-27)
2. The allocation of the consideration in a contract between lease and
nonlease components (as described in paragraphs 842-10-15-28 through
15-32)
3. The determination of the discount rate for the lease (as described in paragraphs 842-20-30-2
through 30-4).
The requirement for an entity to disclose the significant assumptions and judgments it used in applying
ASC 842 in itself involves judgment. That is, the three types of information about significant assumptions
and judgments listed above in ASC 842-20-50-3 (and discussed below) may not always be applicable
and, in some cases, another significant assumption or judgment may be critical and material to an
entity’s financial statements.
15.2.3.1 Whether a Contract Contains a Lease
A lessee should consider disclosing information about the significant
assumptions and judgments used to determine whether a contract is or contains a lease.
(See Chapter 3 for more
information.) Specifically, a customer must consider whether (1) explicitly or
implicitly identified assets have been deployed in the contract and (2) the customer
obtains substantially all of the economic benefits from the use of that underlying asset
and either (a) directs HAFWP the asset is used during the term of the contract or (b)
operates the asset, or has significant input into the design of the asset, when the
relevant decisions about HAFWP are predetermined. When preparing such disclosures, the
lessee should consider the discussion in ASC 842-10-15-2 through 15-27 regarding the
definition of a lease. For example, we believe that if a customer considers its
involvement in the design of the asset when determining whether a contract contains a
lease, significant judgment may be required and disclosure may be warranted.
Illustrative Example — Whether a Contract Contains a Lease
15.2.3.2 Allocation of Consideration in a Contract
A lessee should consider disclosing information about the significant
assumptions and judgments used to determine its allocation of consideration in a
contract or contracts. (See Chapter
4 for more information.) Specifically, the stand-alone prices used to
allocate consideration may be estimated and subject to significant fluctuations over
time. For example, such estimates may be significantly lower or higher than another
entity’s estimates or the estimates may change in future periods and be incorporated
into new leases. (Keep in mind that while estimates made to allocate consideration in a
lease in the current period may differ from those made in prior periods for different
leases, a lessee is not required to revisit its estimates made in prior periods for
different leases, unless a remeasurement event occurs or the contract is modified.) An
entity should consider describing the method used to determine stand-alone prices and
how those estimates may involve less or greater judgment for various lease types (e.g.,
leases based on geography or an asset such as real estate/equipment whose value may
fluctuate depending on economic factors). Note that allocation of consideration in a
contract may be required even if a lessee has elected the practical expedient to combine
lease and nonlease components (see Section
4.3.3.1), since the contract may contain more than one lease component that
must be accounted for separately under ASC 842 (see Section
4.2) or other elements that do not qualify as nonlease components and must
be accounted for under other GAAP.
ASC 842 indicates that, when preparing such disclosures, a lessee should consider the discussion in ASC
842-10-15-28 through 15-32 regarding allocation of consideration in a contract.
Illustrative Example — Allocation of Consideration in a Contract
15.2.3.3 Discount Rate
A lessee should consider disclosing information about the significant assumptions and judgments used to determine its discount rate(s). For example, a lessee may need to disclose information regarding its determination of the incremental borrowing rate, such as collateral assumptions, the term used, and the economic environment in which the lease is denominated. To the extent that a portfolio approach is used to determine discount rates, an entity should consider disclosing information about the composition of the portfolios. (See Chapter 7 for more information about discount rates.)
Non-PBE lessee entities that elect to use a risk-free rate as the discount rate when
the rate implicit in the lease is not readily determinable should disclose the election,
including the asset class(es) for which they have elected this accounting policy (see
Section 7.2.3).
Connecting the Dots
Discount Rate
In comments in recent years, the SEC staff has requested that
registrants explain and revise their disclosures about the determination of the
discount rate used to measure the lease liability and ROU assets recorded in
accordance with ASC 842. In addition, since ASC 842-20-50-4(g)(4) requires lessees
to disclose the weighted-average discount rate for both operating and finance
leases, a lessee should consider whether the discount rate it used for some of its
leases differs significantly from the discount rate it used for other leases and is
therefore affecting the weighted-average calculation disclosed. In these situations,
a lessee may want to consider providing additional disclosures about the discount
rates that are affecting the lessee’s disclosed weighted-average rate. Further, a
lessee with multiple asset classes of leases should consider disclosing how the
weighted-average discount rate was determined for each asset class, including any
significant assumptions or judgments used in that calculation.
For more information about SEC comment letter trends related to
the disclosure requirements in ASC 842, see Deloitte’s Roadmap SEC Comment Letter Considerations,
Including Industry Insights.
15.2.4 Amounts Recognized in the Financial Statements
ASC 842-20
50-4 For each period presented in the financial statements, a lessee shall disclose the following amounts relating to a lessee’s total lease cost, which includes both amounts recognized in profit or loss during the period and any amounts capitalized as part of the cost of another asset in accordance with other Topics, and the cash flows arising from lease transactions:
- Finance lease cost, segregated between the amortization of the right-of-use assets and interest on the lease liabilities.
- Operating lease cost determined in accordance with paragraphs 842-20-25-6(a) and 842-20-25-7.
- Short-term lease cost, excluding expenses relating to leases with a lease term of one month or less, determined in accordance with paragraph 842-20-25-2.
- Variable lease cost determined in accordance with paragraphs 842-20-25-5(b) and 842-20-25-6(b).
- Sublease income, disclosed on a gross basis, separate from the finance or operating lease expense.
- Net gain or loss recognized from sale and leaseback transactions in accordance with paragraph 842-40-25-4.
- Amounts segregated between those for finance and operating leases for the following items:
-
Cash paid for amounts included in the measurement of lease liabilities, segregated between operating and financing cash flows
-
Supplemental noncash information on lease liabilities arising from obtaining right-of-use assets
-
Weighted-average remaining lease term
-
Weighted-average discount rate.
-
Pending Content (Transition Guidance: ASC
220-40-65-1)
50-4 For each period presented in the financial
statements, a lessee shall disclose the following amounts relating
to a lessee's total lease cost, which includes both amounts
recognized in profit or loss during the period and any amounts
capitalized as part of the cost of another asset in accordance
with other Topics, and the cash flows arising from lease
transactions:
-
Finance lease cost, segregated between the amortization of the right-of-use assets and interest on the lease liabilities.
-
Operating lease cost determined in accordance with paragraphs 842-20-25-6(a) and 842-20-25-7.
-
Short-term lease cost, excluding expenses relating to leases with a lease term of one month or less, determined in accordance with paragraph 842-20-25-2.
-
Variable lease cost determined in accordance with paragraphs 842-20-25-5(b) and 842-20-25-6(b).
-
Sublease income, disclosed on a gross basis, separate from the finance or operating lease expense.
-
Net gain or loss recognized from sale and leaseback transactions in accordance with paragraph 842-40-25-4.
-
Amounts segregated between those for finance and operating leases for the following items:
-
Cash paid for amounts included in the measurement of lease liabilities, segregated between operating and financing cash flows
-
Supplemental noncash information on lease liabilities arising from obtaining right-of-use assets
-
Weighted-average remaining lease term
-
Weighted-average discount rate.
-
See paragraphs 220-40-50-21 through 50-25 for additional
disclosure requirements.
50-5 See paragraphs 842-20-55-11 through 55-12 for implementation guidance on preparing the weighted-average remaining lease term and the weighted-average discount rate disclosures. See Example 6 (paragraphs 842-20-55-52 through 55-53) for an illustration of the lessee quantitative disclosure requirements in paragraph 842-20-50-4.
While the disclosure requirements discussed in Section 15.2.3 are largely qualitative, those
addressed in this section are mostly quantitative. When preparing such disclosures, a
lessee will need to gather certain quantitative information about amounts (1) recognized
in the financial statements and (2) derived from the underlying leases recognized in the
financial statements. Such amounts should include those that are recognized in profit or
loss during the period and capitalized as part of the cost of another asset in accordance
with other U.S. GAAP (e.g., a cost that is capitalized into inventory and that will be
recognized as a cost of sales when the inventory is subsequently sold to a customer).
Given the different ways such costs are treated (e.g., inclusion in and
exclusion from recognition on the balance sheet), the FASB found it appropriate to
disaggregate lease costs to increase the transparency of the cash flows expected from
leasing. Further, the Board provides the example below from ASC 842-20-55-53 to illustrate
the disclosure requirements from ASC 842-20-50-4.
ASC 842-20
Illustration of Lessee Quantitative Disclosure
Requirements
55-52 Example 6 illustrates how a lessee may meet the
quantitative disclosure requirements in paragraph 842-20-50-4.
Example 6 — Lessee Quantitative Disclosure Requirements in Paragraph
842-20-50-4
55-53 The following Example illustrates how a lessee may meet the quantitative disclosure requirements in
paragraph 842-20-50-4.
15.2.4.1 Finance Lease Cost
ASC 842-20
50-4 For each period presented in the financial statements, a lessee shall disclose the following amounts relating to a lessee’s total lease cost, which includes both amounts recognized in profit or loss during the period and any amounts capitalized as part of the cost of another asset in accordance with other Topics, and the cash flows arising from lease transactions:
- Finance lease cost, segregated between the amortization of the right-of-use assets and interest on the lease liabilities. . . .
The finance lease cost disclosed represents the entire amount recognized for
finance leases that are recognized on the balance sheet (i.e., excluding variable lease
payments presented as interest expense or a component of income from continuing
operations). In providing this disclosure, the lessee must disaggregate the total
finance lease cost to indicate the amount recorded for the amortization of the ROU asset
and the amount recognized as interest. The lessee should also disclose the financial
statement line item in which these amounts are included if they are not presented
separately on the face of the financial statements.
15.2.4.2 Operating Lease Cost
ASC 842-20
50-4 For each period presented in the financial statements, a lessee shall disclose the following amounts relating to a lessee’s total lease cost, which includes both amounts recognized in profit or loss during the period and any amounts capitalized as part of the cost of another asset in accordance with other Topics, and the cash flows arising from lease transactions: . . .
b. Operating lease cost determined in accordance with paragraphs 842-20-25-6(a) and 842-20-25-7. . . .
The operating lease cost disclosed represents the entire amount recognized for operating leases that are recognized on the balance sheet (i.e., excluding variable lease expense). This cost is determined in accordance with ASC 842-20-25-6(a) and ASC 842-20-25-7, which state, in part:
25-6 After the commencement date, a lessee shall
recognize all of the following in profit or loss, unless the costs are included in
the carrying amount of another asset in accordance with other Topics:
a. A single lease cost, calculated so that the remaining cost of the lease
(as described in paragraph 842-20-25-8) is allocated over the remaining lease
term on a straight-line basis unless another systematic and rational basis is
more representative of the pattern in which benefit is expected to be derived
from the right to use the underlying asset (see paragraph 842-20-55-3), unless
the right-of-use asset has been impaired in accordance with paragraph
842-20-35-9, in which case the single lease cost is calculated in accordance
with paragraph 842-20-25-7 . . . .
25-7 After a right-of-use asset has been impaired in accordance with paragraph 842-20-35-9, the single lease cost described in paragraph 842-20-25-6(a) shall be calculated as the sum of the following:
- Amortization of the remaining balance of the right-of-use asset after the impairment on a straight-line basis, unless another systematic basis is more representative of the pattern in which the lessee expects to consume the remaining economic benefits from its right to use the underlying asset
- Accretion of the lease liability, determined for each remaining period during the lease term as the amount that produces a constant periodic discount rate on the remaining balance of the liability.
The entire amount recognized as a “single lease cost” is the expense recognized for the operating lease
during the period. Note that while the expense recognition pattern for an operating lease differs from
that for a finance lease model (i.e., “interest” expense plus straight-line expense of the ROU asset), such
“single lease cost” is not disaggregated into its underlying component parts (i.e., amortization of the ROU
asset and the change in the lease liability) for presentation purposes.
Connecting the Dots
Operating Lease Cost When ROU Asset Is Impaired
As discussed in Section 8.4.4, in accordance with ASC 842-20-25-7, after an impairment is
recognized on an ROU asset for a lessee’s operating lease, the “straight-line” lease expense is no
longer maintained as the ROU asset is subsequently amortized on a straight-line basis (unless
another systematic basis is more representative of the pattern of use). Despite “breaking” the
straight-line lease pattern, the operating lease expense is still presented as a “single lease cost”
and would be included in the above quantitative disclosure of operating lease cost rather than
being broken into its two component parts for disclosure as a finance lease cost.
15.2.4.3 Short-Term Lease Cost
ASC 842-20
50-4 For each period presented in the financial statements, a lessee shall disclose the following amounts
relating to a lessee’s total lease cost, which includes both amounts recognized in profit or loss during the
period and any amounts capitalized as part of the cost of another asset in accordance with other Topics, and
the cash flows arising from lease transactions: . . .
c. Short-term lease cost, excluding expenses relating to leases with a lease term of one month or less,
determined in accordance with paragraph 842-20-25-2. . . .
While lessees may elect not to recognize short-term leases on the balance sheet (i.e., leases with a lease
term of 12 months or less), lessees are required to disclose short-term lease cost determined under
ASC 842-20-25-2. However, expenses related to leases with a lease term of one month or less are
excluded from this requirement.
Although we expect that most entities will find respite in the “one
month or less” exclusion, entities may sometimes find it more burdensome to extract
leases with a term of one month or less and may prefer to disclose expenses related to
all short-term leases. We believe that an entity may elect to include all expenses
related to leases with a term of one month or less (or all short-term lease expenses by
class of underlying asset) in the short-term lease expense disclosure (despite the
explicit exclusions). We understand that the one month or less exclusion was intended to
provide relief and therefore believe that it would not be inconsistent with the
disclosure principles to disclose all of the short-term lease expenses (including
expenses related to leases with a term of one month or less) if doing so would be less
burdensome. Entities should consider disclosing their policy if leases with a term of
one month or less are included in their short-term lease expense disclosures and the
effect is material.
15.2.4.4 Variable Lease Cost
ASC 842-20
50-4 For each period presented in the financial statements, a lessee shall disclose the following amounts relating to a lessee’s total lease cost, which includes both amounts recognized in profit or loss during the period and any amounts capitalized as part of the cost of another asset in accordance with other Topics, and the cash flows arising from lease transactions: . . .
d. Variable lease cost determined in accordance with paragraphs 842-20-25-5(b) and 842-20-25-6(b). . . .
The variable lease cost disclosure should include the costs discussed in ASC 842-20-25-5(b) and ASC 842-20-25-6(b) — that is, variable lease payments that are not included in the measurement of the lease liability. Such payments may include amounts that are entirely variable and therefore never would have been included in the measurement of the lease liability, or they may represent the difference between (1) the variable amount based on an index or rate and therefore reflected in the lease liability and (2) what is actually incurred. The disclosure requirements do not stipulate that variable lease cost related to finance leases must be disclosed separately from that for operating leases; however, in some instances, entities may find it helpful to perform such disaggregation. In addition, an entity may have short-term lease costs that are also considered variable lease costs. In these circumstances, we believe that it would be acceptable for an entity to include such costs in either the short-term lease cost disclosure or the variable lease cost disclosure. An entity should apply the selected approach consistently between reporting periods and should disclose the approach taken, if material.
Note that as discussed in Section 14.2.2.1, we
believe that it would be acceptable for variable lease payments made under finance
leases to be presented in the statement of comprehensive income as either (1) interest
expense or (2) a component of income from continuing operations (e.g., lease expense).
We recommend that lessees apply the presentation approach they choose consistently on an
entity-wide basis to all leases and that they consider disclosing this approach, if
material.
Connecting the Dots
Variable Lease Cost
If an entity discloses that it elected to use the practical
expedient of not separating lease and nonlease components for real estate leases and
also discloses that it has triple net leases (i.e., leases in which the lessee pays
a single fixed payment for rent but the lessee’s share of property taxes, insurance,
and CAM is generally variable), the entity would be expected to disclose the
variable lease cost related to such triple net leases, since the property taxes,
insurance, and CAM are all deemed to be part of the lease component.
15.2.4.5 Sublease Income
ASC 842-20
50-4 For each period presented in the financial statements, a lessee shall disclose the following amounts relating to a lessee’s total lease cost, which includes both amounts recognized in profit or loss during the period and any amounts capitalized as part of the cost of another asset in accordance with other Topics, and the cash flows arising from lease transactions: . . .
e. Sublease income, disclosed on a gross basis, separate from the finance or operating lease expense. . . .
A lessee should disclose any sublease income it has received on a gross basis
separately from its operating and finance lease expenses. That is, cash inflows received
as a sublessor must be disclosed, on a gross basis, separately from cash outflows the
entity incurs with respect to that same asset that it leases as a lessee in a head
lease. See Section 14.3.1.2.1 for discussion of
whether it would be appropriate to net head lease expense with sublease income in the
income statement.
15.2.4.6 Net Gain or Loss From Sale-and-Leaseback Transactions
ASC 842-20
50-4 For each period presented in the financial statements, a lessee shall disclose the following amounts
relating to a lessee’s total lease cost, which includes both amounts recognized in profit or loss during the
period and any amounts capitalized as part of the cost of another asset in accordance with other Topics, and
the cash flows arising from lease transactions: . . .
f. Net gain or loss recognized from sale and leaseback transactions in accordance with paragraph 842-40-25-4. . . .
To the extent applicable, a seller-lessee should disclose any recognized net gains or losses associated
with any sale-and-leaseback transactions for assets previously owned (or recognized as a result of the
lessee’s involvement in the asset’s construction, as described in Chapter 11) and sold by the lessee.
15.2.4.7 Cash Paid for Amounts Included in Measurement of Lease Liabilities
ASC 842-20
50-4 For each period presented in the financial statements, a lessee shall disclose the following amounts
relating to a lessee’s total lease cost, which includes both amounts recognized in profit or loss during the
period and any amounts capitalized as part of the cost of another asset in accordance with other Topics, and
the cash flows arising from lease transactions: . . .
g. Amounts segregated between those for finance and operating leases for the following items:
1. Cash paid for amounts included in the measurement of lease liabilities, segregated between
operating and financing cash flows. . . .
A lessee should separately disclose its cash paid for finance and operating lease liabilities during the
reporting period. In some cases, these amounts will be separately presented in the statement of cash
flows and such presentation may be sufficient to meet the disclosure requirement. Nonetheless, an
entity should consider separate disclosure, especially if such amounts are not separately presented in
the statement of cash flows in their own activity line items.
15.2.4.8 Supplemental Noncash Information
ASC 842-20
50-4 For each period presented in the financial statements, a lessee shall disclose the following amounts
relating to a lessee’s total lease cost, which includes both amounts recognized in profit or loss during the
period and any amounts capitalized as part of the cost of another asset in accordance with other Topics, and
the cash flows arising from lease transactions: . . .
g. Amounts segregated between those for finance and operating leases for the following items: . . .
2. Supplemental noncash information on lease liabilities arising from obtaining right-of-use assets . . . .
A lessee records an ROU asset upon entering into operating and finance leases. At lease
commencement, the lessee would account for the lease transaction (other than any lease payments
made at lease commencement) as a noncash investing and financing transaction, as discussed in ASC
230-10-50-4. The standard requires separate disclosure of the supplemental noncash information
related to this activity. Amounts for noncash activities related to operating leases should be disclosed
separately from those for finance leases.
In addition to ASC 842-20-50-4(g)(2), other areas of U.S. GAAP include requirements
related to providing noncash disclosures. For example, ASC 230-10-50-3 states, in part,
that “[i]nformation about all investing and financing activities of an entity during a period that affect recognized assets or liabilities but that do not result in cash receipts or cash payments in the period shall be disclosed.” Further, in paragraph 70 of the Basis for Conclusions of Statement 95, the FASB contemplated disclosure requirements
related to situations in which “transactions result in no cash inflows or outflows in
the period in which they occur but generally have a significant effect on the
prospective cash flows of a company.”
We believe that the word “obtaining,” as used in ASC 842-20-50-4(g)(2), should be interpreted as including all noncash increases (debits) to an ROU asset. In addition, events that affect a recognized asset and liability as well as prospective cash flows, including noncash decreases to an ROU asset (credits), should be disclosed as a noncash transaction in light of the guidance in ASC 230-10-50-3 and the Basis for Conclusions of FASB Statement 95 (discussed above).
Accordingly, the requirement to disclose a noncash transaction would also be triggered
in the following circumstances:
- Any lease modification that (1) grants the lessee an additional ROU asset or (2) removes an ROU asset (i.e., physical increases or decreases related to a lessee’s right to use the underlying leased assets). The modification does not need to be accounted for as a separate contract.
- Any other modification or reassessment event that results in increases or decreases (debits or credits) to the ROU asset.
15.2.4.9 Weighted-Average Remaining Lease Term
ASC 842-20
50-4 For each period presented in the financial statements, a lessee shall disclose the following amounts relating to a lessee’s total lease cost, which includes both amounts recognized in profit or loss during the period and any amounts capitalized as part of the cost of another asset in accordance with other Topics, and the cash flows arising from lease transactions: . . .
g. Amounts segregated between those for finance and operating leases for the following items: . . .
3. Weighted-average remaining lease term . . . .
Weighted-Average Remaining Lease Term and Weighted-Average Discount Rate Disclosures
55-11 The lessee should calculate the weighted-average remaining lease term on the basis of the remaining lease term and the lease liability balance for each lease as of the reporting date.
A lessee must disclose — separately for both its operating leases and its finance leases — the weighted-average remaining lease term. Below is an example illustrating how to calculate the weighted-average lease term as of the reporting date. In this example, the reporting date is December 31, 2032, and the entity has six leases outstanding: three operating leases and three finance leases.
As calculated above, in this example, the weighted-average lease term for the operating lease liabilities is approximately 3 years (or approximately 39 months), and the weighted-average lease term for the finance lease liabilities is approximately 4.5 years (or approximately 54 months).
15.2.4.10 Weighted-Average Discount Rate
ASC 842-20
50-4 For each period presented in the financial statements, a lessee shall disclose the following amounts
relating to a lessee’s total lease cost, which includes both amounts recognized in profit or loss during the
period and any amounts capitalized as part of the cost of another asset in accordance with other Topics, and
the cash flows arising from lease transactions: . . .
g. Amounts segregated between those for finance and operating leases for the following items: . . .
4. Weighted-average discount rate.
Weighted-Average Remaining Lease Term and
Weighted-Average Discount Rate Disclosures
55-12 The lessee should calculate the weighted-average discount rate on the basis of both of the following:
- The discount rate for the lease that was used to calculate the lease liability balance for each lease as of the reporting date
- The remaining balance of the lease payments for each lease as of the reporting date.
A lessee must disclose — separately for both its operating leases and its
finance leases — the weighted-average discount rate. Below is an example
illustrating how to calculate the weighted-average discount rate as of the
reporting date (in the example below, the reporting date is December 31,
2026).
15.2.5 Maturity Analysis of Liabilities
ASC 842-20
50-6 A lessee shall disclose a maturity analysis of its finance lease liabilities and its operating lease liabilities separately, showing the undiscounted cash flows on an annual basis for a minimum of each of the first five years and a total of the amounts for the remaining years. A lessee shall disclose a reconciliation of the undiscounted cash flows to the finance lease liabilities and operating lease liabilities recognized in the statement of financial position.
A lessee must disclose a maturity analysis on an undiscounted basis, aggregating all of its finance lease liabilities separately from its aggregated operating lease liabilities. Paragraph BC287 of ASU 2016-02 provides further details regarding the disclosure requirements in ASC 842-20-50-6 and states, in part:
Topic 842 requires that a lessee disclose a maturity analysis of the contractual lease payments included in its lease liabilities at the reporting date to assist users of financial statements in understanding and evaluating the nature and extent of liquidity risks. A lessee should disclose, at a minimum, the amounts due on an annual basis for each of the first five years after the reporting date, plus a lump sum for the remaining years. Those maturity analyses are similar to the maturity analyses that were required in previous GAAP.
In the below example, as of the reporting date (December 31, 20X6), the entity
has five leases — three operating and two finance — and has presented a maturity table
summarizing those lease payments. The total amount of lease payments, on an undiscounted
basis, is reconciled to the lease liability in the statement of financial position
(discounted cash flows).
15.2.6 Lease Transactions With Related Parties
ASC 842-20
50-7 A lessee shall disclose lease transactions between related parties in accordance with paragraphs 850-10-
50-1 through 50-6.
Pending Content (Transition Guidance: ASC 842-10-65-8)
50-7A When the useful life of leasehold improvements to
the common control group determined in accordance with paragraph
842-20-35-12A exceeds the related lease term, a lessee shall
disclose the following information:
-
The unamortized balance of the leasehold improvements at the balance sheet date
-
The remaining useful life of the leasehold improvements to the common control group
-
The remaining lease term.
Lease transactions between related parties should be disclosed in accordance with the guidance in ASC
850. In accordance with ASC 850, a lessee should consider disclosing the nature of the related-party
lease, the related-party relationship, and the terms of the lease that are affected by the relationship.
See Section
E.3.1.11 for a discussion of ASU 2023-01, which provides guidance on leasing
arrangements between entities under common control.
15.2.7 Practical-Expedient Disclosure Related to Short-Term Leases
ASC 842-20
50-8 A lessee that accounts for short-term leases in accordance with paragraph 842-20-25-2 shall disclose that
fact. If the short-term lease expense for the period does not reasonably reflect the lessee’s short-term lease
commitments, a lessee shall disclose that fact and the amount of its short-term lease commitments.
When a lessee elects the short-term lease recognition exemption by class of underlying asset (which results in off-balance-sheet accounting for the lease), it should disclose that it has done so. While a lessee may continue to apply a short-term lease exemption, if its activities in the reporting period do not give financial statement users a reasonable reflection of upcoming liabilities, the lessee should disclose that fact and adequately disclose the amount of its short-term lease commitments.
15.2.8 Practical-Expedient Disclosure Related to Not Separating Lease and Nonlease Components
ASC 842-20
50-9 A lessee that elects the practical expedient on not separating lease components from nonlease components in paragraph 842-10-15-37 shall disclose its accounting policy election and which class or classes of underlying assets it has elected to apply the practical expedient.
When a lessee elects the practical expedient under which it does not need to separate lease components from nonlease components, it should disclose this fact as well as the “class or classes of underlying assets” for which it has made the election. (See further discussion of this practical expedient in Section 4.3.3.1.)
15.3 Lessor Disclosure Requirements
ASC 842-30
50-1 The objective of the disclosure requirements is to enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. To achieve that objective, a lessor shall disclose qualitative and quantitative information about all of the following:
- Its leases (as described in paragraphs 842-30-50-3(a), 842-30-50-4, and 842-30-50-7)
- The significant judgments made in applying the requirements in this Topic to those leases (as described in paragraph 842-30-50-3(b))
- The amounts recognized in the financial statements relating to those leases (as described in paragraphs 842-30-50-5 through 50-6 and 842-30-50-8 through 50-13).
50-2 A lessor shall consider the level of detail necessary to satisfy the disclosure objective and how much emphasis to place on each of the various requirements. A lessor shall aggregate or disaggregate disclosures so that useful information is not obscured by including a large amount of insignificant detail or by aggregating items that have different characteristics.
50-8 In addition to the disclosures required by paragraphs 842-30-50-3 through 50-7, a lessor also shall provide the disclosures in paragraphs 842-30-50-9 through 50-10 for sales-type leases and direct financing leases.
50-11 In addition to the disclosures required by paragraphs 842-30-50-3 through 50-7, a lessor also shall provide the disclosures in paragraphs 842-30-50-12 through 50-13 for operating leases.
The disclosure objective for lessors is the same as that for lessees (i.e., “to enable users of financial
statements to assess the amount, timing, and uncertainty of cash flows arising from leases”). However,
a lessor should consider the different, lessor-related information that a user of its financial statements
may be concerned about. Paragraph BC16 of ASU 2016-02 indicates that part of the reason the FASB
increased the lessor disclosure requirements was because disclosures under ASC 840 were insufficient:
Some users of financial statements also criticized previous GAAP applicable to lessors because that guidance
did not provide adequate information about a lessor’s exposure to credit risk (arising from a lease) and
exposure to asset risk (arising from the lessor’s retained interest in the underlying asset), particularly for those
leases of assets that were previously classified as operating leases.
Illustrative Example — Disclosure Disaggregation
The following are examples of ways a lessor may choose to disaggregate its lessor disclosures:
Another reason ASC 842 requires more disclosures for lessors is that the Board views a lessor’s activities
as similar to other revenue-generating activities, and the lack of disclosure regarding revenue was a key
issue that the Board addressed in its project on revenue from contracts with customers.
The lessor disclosure requirements are further subdivided into the following topics:
- Information about the nature of an entity’s leases (Section 15.3.1).
- General description of leases (Section 15.3.1.1).
- Basis and terms and conditions on which variable lease payments are determined (Section 15.3.1.2).
- Terms and conditions of options to extend or terminate leases (Section 15.3.1.3).
- Existence of terms and conditions for a lessee to purchase a leased asset (Section 15.3.1.4).
- Significant assumptions and judgments (Section 15.3.2).
- Whether a contract contains a lease (Section 15.3.2.1).
- Allocation of consideration in a contract (Section 15.3.2.2).
- Amount lessor expects to derive from underlying asset after the end of the lease term (Section 15.3.2.3).
- Practical-expedient disclosure related to not separating lease and nonlease components (Section 15.3.2.4).
- Lease transactions with related parties (Section 15.3.3).
- Residual assets and risk management (Section 15.3.4).
- Amounts recognized in the financial statements (Section 15.3.5).
-
Sales-type leases and direct financing leases (Section 15.3.5.1).
-
Tabular disclosures (Section 15.3.5.1.1).
-
Components of net investments in leases (Section 15.3.5.1.2).
-
Significant changes in the balance of unguaranteed residual assets and deferred selling profit (Section 15.3.5.1.3).
-
Maturity analysis of lease receivables (Section 15.3.5.1.4).
-
-
Operating leases (Section 15.3.5.2).
-
Tabular disclosures (Section 15.3.5.2.1).
-
Maturity analysis of lease payments (Section 15.3.5.2.2).
-
Separate ASC 360 disclosures (Section 15.3.5.2.3).
-
- Variable lease income (Section 15.3.5.3).
-
- Practical-expedient disclosure related to sales taxes and other similar taxes collected from lessees (Section 15.3.6).
15.3.1 Information About the Nature of an Entity’s Leases
ASC 842-30
50-3 A lessor shall disclose both of the following:
- Information about the nature of its leases, including:
- A general description of those leases
- The basis and terms and conditions on which variable lease payments are determined
- The existence and terms and conditions of options to extend or terminate the lease
- The existence and terms and conditions of options for a lessee to purchase the underlying asset. . . .
A lessor should disclose information about its leases in a manner consistent with the disclosure objective described above. Generally, disclosures provided under this requirement are more qualitative.
15.3.1.1 General Description of Leases
ASC 842-30
50-3 A lessor shall disclose both of the following:
- Information about the nature of its leases, including:
- A general description of those leases . . . .
The considerations related to a lessor’s disclosure of a general description of its leases are similar to those for lessees. See Section 15.2.1.1 for more information.
Illustrative Example — General Description of an Entity’s Leases
15.3.1.2 Basis and Terms and Conditions on Which Variable Lease Payments Are Determined
ASC 842-30
50-3 A lessor shall disclose both of the following:
- Information about the nature of its leases, including: . . .2. The basis and terms and conditions on which variable lease payments are determined . . . .
As discussed in Section
6.3, only some variable lease payments (those based on an
index or rate) are included in the initial and subsequent measurement of any
(1) recognized net investment in the lease for sales-type or direct
financing leases or (2) lease receivables for operating leases. Because
variable lease payments are treated in different ways, the determination of
what type of variability exists in a lease contract and whether that
variability is included or excluded from amounts recognized on the balance
sheet is critical to understanding lease income and achieving the disclosure
objective (i.e., information about the timing and uncertainty of the
entity’s cash flows). Therefore, the terms and conditions related to
variability provide the user with information about amounts that are not
recorded on the balance sheet because variable lease payments not based on
an index or rate are not included in recorded balance sheet amounts and
could be considered more volatile forms of revenue and potential future cash
inflows.
Therefore, although it is not expressly required to do so, it may be helpful for
an entity to describe the sources of the variability in two separate groups:
(1) the amounts included in (a) the net investment in the lease for
sales-type and direct financing leases and (b) lease receivables for
operating leases and (2) the variability that is excluded. In addition, an
entity must explain the types of variability within its contracts, and that
explanation must include a discussion of key terms and conditions. For
example, an entity may receive variable lease payments because a lessee’s
rental payment is determined on the basis of a percentage of its store’s
sales. Because of its volatility, users view this variability differently
from how they view a fixed rental payment; the more transparent the source
of that volatility, the better a user can understand the nature, timing, and
uncertainty of the entity’s future cash flows. Sometimes, however, the
variability in future lease payments may be more complex, in which case a
lessor may need to provide additional information.
Illustrative Example — Basis and Terms and Conditions on Which Variable Lease Payments Are Determined
Variable lease payments that are based on an index or rate:
15.3.1.3 Terms and Conditions of Options to Extend or Terminate Leases
ASC 842-30
50-3 A lessor shall disclose both of the following:
- Information about the nature of its leases, including: . . .3. The existence and terms and conditions of options to extend or terminate the lease . . . .
Disclosures about terms and conditions related to options to extend or terminate leases should allow a user to assess the rights of the entity’s customers in the contracts. Such information may be helpful for users who want to understand situations in which lessors have contractually agreed to lease payments that may not be at market terms in the future (i.e., fixed-price renewal options on real estate).
Illustrative Example — Terms and Conditions of Options to Extend or Terminate Leases
15.3.1.4 Existence of Terms and Conditions for a Lessee to Purchase a Leased Asset
ASC 842-30
50-3 A lessor shall disclose both of the following:
- Information about the nature of its leases, including: . . .4. The existence and terms and conditions of options for a lessee to purchase the underlying asset. . . .
Regardless of whether it is reasonably certain that a lessee will exercise a
right to purchase an underlying asset, a lessor should disclose the
existence of such terms and conditions. Such disclosure allows a user to
understand when there may be an effective cap on the cash flows realizable
in the contract (e.g., if the purchase option is a fixed-price purchase
option).
15.3.2 Significant Assumptions and Judgments
ASC 842-30
50-3 A lessor shall disclose both of the following: . . .
b. Information about significant assumptions and judgments made in applying the requirements of
this Topic, which may include the following:
1. The determination of whether a contract contains a lease (as described in paragraphs 842-10-15-2 through 15-27)
2. The allocation of the consideration in a contract between lease and
nonlease components (as described in paragraphs
842-10-15-28 through 15-32), unless a lessor
elects the practical expedient in paragraph
842-10-15-42A and all nonlease components in the
contract qualify for that practical
expedient
3. The determination of the amount the lessor expects to derive from the underlying asset following the end of the lease term.
50-3A An entity that elects the practical expedient in paragraph 842-10-15-42A on not separating nonlease components from associated lease components (including an entity that accounts for the combined component entirely in Topic 606 on revenue from contracts with customers) shall disclose the following, by class of underlying asset:
- Its accounting policy election and the class or classes of underlying assets for which it has elected to apply the practical expedient
- The nature of:
- The lease components and nonlease components combined as a result of applying the practical expedient
- The nonlease components, if any, that are accounted for separately from the combined component because they do not qualify for the practical expedient
- The Topic the entity applies to the combined component (this Topic or Topic 606).
The considerations related to a lessor’s disclosures about significant assumptions and judgments are
similar to those for lessees. For more information, see Section 15.2.3.
15.3.2.1 Whether a Contract Contains a Lease
ASC 842-30
50-3 A lessor shall disclose both of the following: . . .
b. Information about significant assumptions and judgments made in applying the requirements of this Topic, which may include the following:
1. The determination of whether a contract contains a lease (as described
in paragraphs 842-10-15-2 through 15-27) . . .
.
The lessor’s considerations related to disclosures about significant judgments used to determine whether a contract contains a lease are similar to those for lessees. For more information, see Section 15.2.3.1.
Illustrative Example — Whether a Contract Contains a Lease
15.3.2.2 Allocation of Consideration in a Contract
ASC 842-30
50-3 A lessor shall disclose both of the following: . . .
b. Information about significant assumptions and judgments made in applying the requirements of this
Topic, which may include the following: . . .
2. The allocation of the consideration in a contract between lease and
nonlease components (as described in paragraphs
842-10-15-28 through 15-32), unless a lessor
elects the practical expedient in paragraph
842-10-15-42A and all nonlease components in the
contract qualify for that practical expedient . .
. .
The lessor’s considerations related to disclosures about significant judgments used to determine the
allocation of consideration in a contract are similar to those for lessees. For more information, see
Section 15.2.3.2.
Illustrative Example — Allocation of Consideration in a Contract
Note that in July 2018, the FASB issued ASU 2018-11, which contains a
practical expedient under which lessors can elect, by class of underlying
asset, not to separate lease and nonlease components, provided that the
associated nonlease component(s) otherwise would be accounted for under the
revenue guidance in ASC 606 and both of the following conditions are met:
-
Criterion A — The timing and pattern of transfer for the lease component are the same as those for the nonlease components associated with that lease component.
-
Criterion B — The lease component, if accounted for separately, would be classified as an operating lease.
The ASU also clarifies that the presence of a nonlease component that is ineligible for the practical expedient does not preclude a lessor from electing the expedient for the lease component and nonlease component(s) that meet the criteria. Rather, the lessor would account for the nonlease components that do not qualify for the practical expedient separately from the combined lease and nonlease components that do qualify.
See Section 4.3.3.2
for further details about the practical expedient related to a lessor’s
election not to separate lease and nonlease components and Section 15.3.2.4 for
the disclosure requirements related to this practical expedient.
15.3.2.3 Amount Lessor Expects to Derive From the Underlying Asset After the End of the Lease Term
ASC 842-30
50-3 A lessor shall disclose both of the following: . . .
b. Information about significant assumptions and judgments made in applying the requirements of this Topic, which may include the following: . . .
3. The determination of the amount the lessor expects to derive from the underlying asset following the end of the lease term.
An entity considers various inputs when evaluating the amount it expects to
derive from its leased assets at the end of the lease terms, including the
following:
-
The remaining useful life.
-
Expected market conditions:
-
Fair value of lease payments.
-
Expected fair values of underlying assets.
-
-
Expected deployment of underlying asset in business (e.g., re-lease or sell).
The estimated amount of the residual asset directly affects the gain (in a sales-type lease) or loss (in either a sales-type or a direct financing lease) the entity recognizes upon commencement of the lease. Therefore, this estimate and any related assumptions should be disclosed because they are critical to a user’s understanding of the amount of the gain or loss recognized and potential future cash flows.
15.3.2.4 Practical-Expedient Disclosure Related to Not Separating Lease and Nonlease Components
ASC 842-30
50-3A An entity that elects the practical expedient in paragraph 842-10-15-42A on not separating nonlease
components from associated lease components (including an entity that accounts for the combined
component entirely in Topic 606 on revenue from contracts with customers) shall disclose the following, by
class of underlying asset:
- Its accounting policy election and the class or classes of underlying assets for which it has elected to apply the practical expedient
- The nature of:
- The lease components and nonlease components combined as a result of applying the practical expedient
- The nonlease components, if any, that are accounted for separately from the combined component because they do not qualify for the practical expedient
- The Topic the entity applies to the combined component (this Topic or Topic 606).
When a lessor elects the practical expedient to combine lease and nonlease components in a contract,
it is required to provide certain disclosures. Such disclosures include (1) the lessor’s election to combine
lease components with associated nonlease components, (2) the class(es) of underlying asset(s) for
which the election was made, (3) the nature of the items that are being combined, (4) any nonlease
components that were not eligible for the practical expedient, and (5) which standard applies to the
combined component (i.e., ASC 842 or ASC 606). (See Section 4.3.3.2 for further discussion of this
practical expedient.)
15.3.3 Lease Transactions With Related Parties
ASC 842-30
50-4 A lessor shall disclose any lease transactions between related parties (see Topic 850 on related party
disclosures).
Lessors should disclose lease transactions between related parties in a manner consistent with the
guidance in ASC 850. In accordance with ASC 850, a lessor should consider disclosing the nature of the
related-party lease, the related-party relationship, and the terms of the lease that are affected by the
relationship.
See Section
E.3.1.11 for a discussion of ASU 2023-01, which provides guidance
on leasing arrangements between entities under common control.
15.3.4 Residual Assets and Risk Management
ASC 842-30
50-7 A lessor shall disclose information about how it manages its risk associated with the residual value of its
leased assets. In particular, a lessor should disclose all of the following:
- Its risk management strategy for residual assets
- The carrying amount of residual assets covered by residual value guarantees (excluding guarantees considered to be lease payments for the lessor, as described in paragraph 842-30-30-1(a)(2))
- Any other means by which the lessor reduces its residual asset risk (for example, buyback agreements or variable lease payments for use in excess of specified limits).
Paragraph BC331 of ASU 2016-02 describes the FASB’s rationale for including the above disclosure
requirements related to residual assets in ASC 842-30-50-7:
While users generally said that the lessor accounting model in previous GAAP provided them with the financial
information they needed, many users indicated that they needed more information about the lessor’s residual
assets and exposure to residual asset risk. The latter (exposure to residual asset risk) is addressed by the
lessor disclosure requirements discussed in paragraphs BC339 and BC340. Regarding the former (information
about the lessor’s residual assets), the Board noted that users will benefit from the disclosure of a lessor’s
unguaranteed residual assets separate from the lessor’s lease receivable. That is, because, although linked,
those assets (that is the unguaranteed residual asset and the lease receivable) have different natures, risks,
and liquidity. Separate disclosure of those assets will improve the transparency of information provided to
users of financial statements about a lessor’s exposure to credit risk (relating to the lease receivable, which
includes any guaranteed portion of the underlying assets’ estimated residual value) and asset risk (relating to
the unguaranteed residual asset).
Further, paragraph BC340 of ASU 2016-02 states the following regarding the Board’s reasoning behind
changing the previous U.S. GAAP guidance on this topic:
A primary concern of users on the disclosure requirements in previous GAAP is the lack of transparency
about how the lessor manages its exposure to residual value risk. While users generally said that the lessor
accounting model in previous GAAP provided them with the financial information they needed, many users
indicated that additional information was needed about the lessor’s residual assets and exposure to residual
risk. Uncertainty about the residual value of the underlying asset at the end of the lease is a lessor’s primary
risk, particularly for a lessor of equipment and vehicles. This is because a decline in the market value of leased
equipment and vehicles at a rate greater than the rate the lessor projected (on the basis of its policy on residual
value measurement) would adversely affect the profitability of the lease. Residual value realization at the end of
the lease term might be affected by several factors (for example, rapid technological or economic obsolescence,
unusual wear and tear, excess use, or manufacturer’s warranties). Consequently, the Board decided that a
lessor should disclose how it manages its residual value risk to enable users to assess the uncertainty of cash flows arising from a lessor’s leases and from its leased assets. The Board considered that producing residual risk disclosures will carry an incremental cost to preparers, but it decided to require the disclosures on the basis that this is an area in which users have consistently requested additional information and told the Board that the financial reporting for lessors in previous GAAP was inadequate for their information needs in many cases.
Connecting the Dots
Disclosures About Residual Asset Risk May Not Be as Applicable to
Lessors of Real Estate
Residual value risk might not be a primary risk for many lessors of property
(i.e., land or buildings in this context) because of the long-lived
nature of those assets as well as the propensity for such assets to hold
their value or, in many cases, to appreciate. In such cases, a
lessor may consider providing more limited narrative disclosures.
15.3.5 Amounts Recognized in the Financial Statements
15.3.5.1 Sales-Type Leases and Direct Financing Leases
15.3.5.1.1 Tabular Disclosures
ASC 842-30
50-5 A lessor shall disclose lease income recognized in each annual and interim reporting period, in a tabular format, to include the following:
a. For sales-type leases and direct financing leases:
1. Profit or loss recognized at the commencement date (disclosed on a gross basis or a net basis consistent with paragraph 842-30-45-4)
2. Interest income either in aggregate or separated by components of the
net investment in the lease. . . .
The table below outlines information that an entity would need to disclose for sales-type or direct financing leases to comply with the requirements in ASC 842-30-50-5 above.
Lessor Uses Leasing to “Sell” PP&E It Would Otherwise Sell | ||
|---|---|---|
Sales-Type Lease | Direct Financing Lease | |
Selling profit at lease commencement | Gross selling price, cost of leased property, selling profit | Not applicable — no selling profit is recognized at lease commencement for direct financing leases |
Selling loss | Gross selling price, cost of leased property, selling loss | |
Interest income | Disclose interest income either in the aggregate or separated by components of
the net investment in the lease. That is, disclose
interest income related to (1) the interest earned
on the lease receivable and (2) the accretion of
the unguaranteed residual value of the asset. | Disclose interest income either in the aggregate or separated by components of the net investment in the lease. That is, disclose interest income related to (1) the interest earned on the lease receivable, (2) the accretion of the unguaranteed residual value of the asset, and (3) any deferred selling profit included in the net investment balance. |
Lessor Uses Leasing to Provide Financing to Lessees | ||
|---|---|---|
Sales-Type Lease | Direct Financing Lease | |
Selling profit
at lease
commencement | Selling profit | Not applicable — no selling profit is
recognized at lease commencement for
direct financing leases |
Selling loss | Selling loss | |
Interest income | Disclose interest income either in the aggregate or separated by components of
the net investment in the lease. That is, disclose
interest income related to (1) the interest earned
on the lease receivable and (2) the accretion of
the unguaranteed residual value of the asset. | Disclose interest income either in the
aggregate or separated by components
of the net investment in the lease. That is,
disclose interest income related to (1) the
interest earned on the lease receivable, (2)
the accretion of the unguaranteed residual
value of the asset, and (3) any deferred
selling profit included in the net investment
balance. |
Example 15-1
Disclosures Related to Sales-Type Lease
The following disclosures are based on the calculations in Section
9.3.7:
Example 15-2
Disclosures Related to Direct Financing Lease
The following disclosures are based on the calculations in Section
9.3.8:
15.3.5.1.2 Components of Net Investments in Leases
ASC 842-30
50-6 A lessor shall disclose in the notes the components of its aggregate net investment in sales-type and direct financing leases (that is, the carrying amount of its lease receivables, its unguaranteed residual assets, and any deferred selling profit on direct financing leases).
The following is an example of a disclosure an
entity might provide to comply with the above requirement in ASC
842-30-50-6 regarding disclosure of components of net investments in
leases:
Connecting the Dots
ASC 842-30-50-6 requires preparers to disclose the carrying
amount of the components of net investments in
sales-type and direct financing leases (i.e., the carrying
amount of an entity’s lease receivables, its unguaranteed
residual assets, and any deferred selling profit on direct
financing leases). Accordingly, under ASC 842, preparers are not
required to disclose the gross amount (i.e., the
undiscounted amount) of the components of net investments in
sales-type and direct financing leases. It would therefore not
be consistent with the disclosure requirements in ASC 842-30 for
an entity to disclose gross amounts of components of net
investments in sales-type and direct financing leases, with an
“unearned income” balance (encompassing the impact of adjusting
the components to present value).
15.3.5.1.3 Significant Changes in the Balance of Unguaranteed Residual Assets and Deferred Selling Profit
ASC 842-30
50-9 A lessor shall explain significant changes in the balance of its unguaranteed residual assets and deferred selling profit on direct financing leases.
Significant changes in the “balance of [a lessor’s] unguaranteed residual assets
and deferred selling profit on direct financing leases” must be
disclosed. Such changes could be associated with fluctuations in the
residual asset value governed by technological or other market
influences, termination or completion of the lease, or impairment of the
underlying asset.
15.3.5.1.4 Maturity Analysis of Lease Receivables
ASC 842-30
50-10 A lessor shall disclose a maturity analysis of its lease receivables, showing the undiscounted cash flows to be received on an annual basis for a minimum of each of the first five years and a total of the amounts for the remaining years. A lessor shall disclose a reconciliation of the undiscounted cash flows to the lease receivables recognized in the statement of financial position (or disclosed separately in the notes).
The below example3 includes a maturity analysis of lease receivables as well as a reconciliation to the
total amount of receivables recognized in the statement of financial position.
15.3.5.2 Operating Leases
A lessor should treat assets subject to operating leases as a major class of depreciable assets.
Specifically, paragraph BC341 of ASU 2016-02 states, in part:
[A] lessor should provide the required property, plant, and equipment disclosures for assets subject to
operating leases separately from owned assets held and used by the lessor. In the Board’s view, leased assets
often are subject to different risks than owned assets that are held and used (for example, the decrease in the
value of the underlying asset in a lease could be due to several factors that are not within the control of the
lessor), and, therefore, users will benefit from lessors segregating their disclosures related to assets subject to
operating leases from disclosures related to other owned property, plant, and equipment.
15.3.5.2.1 Tabular Disclosures
ASC 842-30
50-5 A lessor shall disclose lease income recognized in each annual and interim reporting period, in a tabular
format, to include the following: . . .
b. For operating leases, lease income relating to lease payments. . . .
In interim and annual reporting periods, a lessor should disclose, within its tabular disclosure of lease
income, lease income related to lease payments from operating leases.
15.3.5.2.2 Maturity Analysis of Lease Payments
ASC 842-30
50-12 A lessor shall disclose a maturity analysis of lease payments, showing the undiscounted cash flows to be received on an annual basis for a minimum of each of the first five years and a total of the amounts for the remaining years. A lessor shall present that maturity analysis separately from the maturity analysis required by paragraph 842-30-50-10 for sales-type leases and direct financing leases.
With respect to the requirement in ASC 842-30-50-12 for a lessor to disclose a maturity analysis of operating lease payments, a reconciliation of the cash flows to the receivable balance is not required because a receivable similar to that recorded under a direct financing or sales-type lease is not recorded under an operating lease. (See Section 15.3.5.1.4.)
15.3.5.2.3 Separate ASC 360 Disclosures
ASC 842-30
50-13 A lessor shall provide disclosures required by Topic 360 on property, plant, and equipment separately for underlying assets under operating leases from owned assets.
To comply with the disclosure requirement above, an entity will need to consider the disclosure requirements in ASC 360-10-50, including those related to items such as depreciation, balances of major classes of assets, and impairment considerations.
15.3.5.3 Variable Lease Income
ASC 842-30
50-5 A lessor shall disclose lease income recognized in each annual and interim reporting period, in a tabular format, to include the following: . . .
c. Lease income relating to variable lease payments not included in the measurement of the lease receivable.
In interim and annual reporting periods, a lessor should disclose, within its
tabular disclosure of lease income, lease income related to variable lease
payments. This amount should include variable lease income associated with
all lease classifications, but it should exclude any lease income already
disclosed within the sales-type lease, direct-financing lease, or operating
lease disclosures (i.e., it should exclude lease income related to payments
included in the measurement of the lease receivable or in the calculation of
straight-line operating lease income).
15.3.6 Practical-Expedient Disclosure Related to Sales Taxes and Other Similar Taxes Collected From Lessees
ASC 842-30
50-14 A lessor that makes the accounting policy election in paragraph 842-10-15-39A shall disclose its accounting policy election and comply with the disclosure requirements in paragraphs 235-10-50-1 through 50-6.
When a lessor elects, as an accounting policy, to exclude from revenue and
expenses sales taxes and other similar taxes assessed by a governmental
authority and collected by the lessor from a lessee, it should disclose that it
has done so. See Section
E.3.1.5 for detailed discussion of ASU 2018-20, including
transition requirements.
Footnotes
3
Assume that the lessor has one lease with a remaining lease term of six years and annual lease payments of $9,500.
15.4 Sale-and-Leaseback Transactions
ASC 842-40
50-1 If a seller-lessee or a
buyer-lessor enters into a sale and leaseback transaction
that is accounted for in accordance with paragraphs
842-40-25-4 and 842-40-30-1 through 30-3, it shall provide
the disclosures required in paragraphs 842-20-50-1 through
50-10 for a seller-lessee or paragraphs 842-30-50-1 through
50-13 for a buyer-lessor.
50-2 In addition to the
disclosures required by paragraphs 842-20-50-1 through
50-10, a seller-lessee that enters into a sale and leaseback
transaction shall disclose both of the following:
-
The main terms and conditions of that transaction
-
Any gains or losses arising from the transaction separately from gains or losses on disposal of other assets.
An entity that enters into a sale-and-leaseback transaction must provide disclosures in addition to those outlined in Sections 15.2 and 15.3 for lessees and lessors, respectively. In addition, a seller-lessee must disclose the terms and conditions of the sale-and-leaseback transaction and present the gains and losses resulting from the transaction separately from those arising from other asset disposals.
ASC 842 does not explicitly require disclosures regarding failed sale-and-leaseback
transactions. We believe that entities should consider the disclosure requirements
in other applicable GAAP (e.g., ASC 470, ASC 835-30) under which a failed
sale-and-leaseback transaction is accounted for as a financing arrangement. See
Section 10.4.2 for a detailed discussion
of failed sale-and-leaseback transactions.
15.5 Annual and Interim Disclosures
This section outlines the comparative-period disclosure requirements (i.e., for
the comparative annual periods presented in an entity’s financial statements) and
interim disclosure requirements under ASC 842.
15.5.1 Comparative Periods
Some of the disclosure requirements outlined in the sections above start with
the wording “for each period presented in the financial statements, a lessee
shall disclose.” These statements typically accompany quantitative requirements
such as those in ASC 842-20-50-4 (lessee amounts recognized in the balance
sheet). Therefore, these quantitative disclosures should be presented
comparatively with respect to the prior annual periods presented. Other
requirements, such as the qualitative requirements, do not necessarily lend
themselves to separate disclosures for the comparative balance sheet dates
presented and therefore may be discussed only as of the reporting date (rather
than on a comparative basis).
15.5.2 Interim Disclosures
Interim disclosure requirements are outlined in ASC 270. Generally, ASC 270
requires that entities report significant changes in financial position (see ASC
270-10-50-4) and changes in accounting principles and estimates (see ASC
270-10-45-12 through 45-16), along with other information that helps users
understand the interim financial reporting results compared with those for its
most recent annual period.
In addition, ASC 270 requires lessors to provide the following disclosure on
both an interim and annual basis:
ASC 270-10
50-6A A lessor shall disclose a table of all lease-related income items in its interim financial statements (see
paragraph 842-30-50-5 for lease-related income items).
Other than this one explicit requirement for lessors, no disclosures are
prescribed for lessees and lessors on an interim basis. The aforementioned
lease-related income items required for lessors are detailed in ASC 842-30-50-5
and further discussed in Sections 15.3.5.1.1 and 15.3.5.2.1.
Connecting the Dots
Interim Disclosures
While there are no explicit interim requirements, an
entity may elect to provide interim lease disclosures in a manner
consistent with how it provides disclosures in its annual financial
statements if the entity’s leasing activities are significant or if
there are significant changes in its leasing activities on an interim
basis. Further, we believe that providing the required annual lease
disclosures for each interim period could alleviate a significant amount
of work at year-end. That is, it will most likely take entities
significant time to compile the amount of information required, and
discussed throughout this chapter, if it is accumulated at year-end for
a full year of activity. Therefore, entities that have controls and
processes in place to accumulate this information throughout the year
may find it less burdensome to prepare their annual disclosures.