Chapter 16 — Effective Date and Transition

16.1 Overview

ASC 842-10

65-1 The following represents the transition and effective date information related to Accounting Standards Update . . . No. 2016-02, Leases (Topic 842) . . .

A public business entity, a not-for-profit entity that has issued or is a conduit bond obligor for securities that are traded, listed, or quoted on an exchange or an over-the-counter market (with an exception for those entities that have not yet issued their financial statements or made financial statements available for issuance as described in the following sentence), and an employee benefit plan that files or furnishes financial statements with or to the U.S. Securities and Exchange Commission shall apply the pending content that links to this paragraph for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. A not-for-profit entity that has issued or is a conduit bond obligor for securities that are traded, listed, or quoted on an exchange or an over-the-counter market that has not yet issued financial statements or made financial statements available for issuance as of June 3, 2020 shall apply the pending content that links to this paragraph for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Earlier application is permitted.
All other entities shall apply the pending content that links to this paragraph for financial statements issued for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Earlier application is permitted. . . .

In November 2019, the FASB issued ASU 2019-10, which (1) provided a framework for staggering the effective dates of future major accounting standards and (2) amended the effective dates of certain major new accounting standards to give implementation relief to certain types of entities. In June 2020, the FASB issued ASU 2020-05, which further amended the effective dates to give implementation relief to certain types of entities in response to the COVID-19 pandemic. ASU 2020-05 amended the effective dates of ASU 2016-02 as follows:

	Public Companies1	Public NFPs2	All Other Entities
As originally issued (ASU 2016-02)	Fiscal years beginning after December 15, 2018, and interim periods therein	Fiscal years beginning after December 15, 2018, and interim periods therein	Fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020
As amended by ASU 2019-10	No changes	No changes	Fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021
As amended by ASU 2020-05	No changes	Fiscal years beginning after December 15, 2019, and interim periods therein	Fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022

Bridging the GAAP

Comparison With IFRS 16

The effective date of IFRS 16 is similar to the effective date of ASU 2016-02 for PBEs. However, the IASB decided that an entity would only be allowed to early adopt IFRS 16 if it has also adopted IFRS 15 (the IASB’s revenue standard). The IASB decided to limit early adoption of IFRS 16 because, as noted in paragraph BC272 of IFRS 16, “some of the requirements in IFRS 16 depend on an entity also applying the requirements of IFRS 15 (and not the Standards that were superseded by IFRS 15).”

ASC 842-10

65-1 The following represents the transition and effective date information related to Accounting Standards Update . . . No. 2016-02, Leases (Topic 842) . . .

c. In the financial statements in which an entity first applies the pending content that links to this paragraph, the entity shall recognize and measure leases within the scope of the pending content that links to this paragraph that exist at the application date, as determined by the transition method that the entity elects. An entity shall apply the pending content that links to this paragraph using one of the following two methods:

1. Retrospectively to each prior reporting period presented in the financial statements with the cumulative effect of initially applying the pending content that links to this paragraph recognized at the beginning of the earliest comparative period presented, subject to the guidance in (d) through (gg). Under this transition method, the application date shall be the later of the beginning of the earliest period presented in the financial statements and the commencement date of the lease.

2. Retrospectively at the beginning of the period of adoption through a cumulative-effect adjustment, subject to the guidance in (d) through (gg). Under this transition method, the application date shall be the beginning of the reporting period in which the entity first applies the pending content that links to this paragraph.

d. An entity shall adjust equity and, if the entity elects the transition method in (c)(1), the other comparative amounts disclosed for each prior period presented in the financial statements, as if the pending content that links to this paragraph had always been applied, subject to the requirements in (e) through (gg).

e. If a lessee elects not to apply the recognition and measurement requirements in the pending content that links to this paragraph to short-term leases, the lessee shall not apply the approach described in (k) through (t) to short-term leases.

See Examples 28 through 29 (paragraphs 842-10-55-243 through 55-254) for illustrations of the transition requirements for an entity that applies the pending content that links to this paragraph in accordance with (c)(1). . . .

An entity adopts ASC 842 by using a modified retrospective transition approach. Under this approach, the standard is effectively implemented either (1) as of the earliest period presented and through the comparative periods in the entity’s financial statements or (2) as of the effective date of ASC 842, with a cumulative-effect adjustment to equity (see Section 16.1.1). The modified nature of this transition approach is intended to maximize comparability while reducing the complexity of transition compared with the full retrospective approach, under which financial statements would be prepared as if ASC 842 was always effective.

ASC 842 provides for certain practical expedients in transition. Depending on the expedients elected, certain aspects of ASC 842 will not be implemented until the standard’s effective date, regardless of whether an entity elects to recast comparative periods under ASC 842. The practical expedients are intended to reduce the cost and complexity of adoption while maintaining financial statement comparability after adoption.

Connecting the Dots

Modified Retrospective Transition Under ASC 842 Differs From That Under ASC 606

An entity that elects the modified retrospective transition option in ASC 606 is permitted to apply ASC 606 only to the current-year financial statements (i.e., the financial statements for the year in which ASC 606 is first implemented). Such an entity will record a cumulative-effect adjustment to the opening balance of retained earnings in the year in which it first adopts ASC 606. By contrast, an entity that uses the modified retrospective transition approach under ASC 842 may record an adjustment as of the beginning of either the earliest year presented or the first year of adoption.

16.1.1 Entities Permitted to Elect Not to Restate Comparative Periods in the Period of Adoption

In July 2018, the FASB issued ASU 2018-11, which amended certain aspects of ASC 842 to provide relief from the costs of implementing the new leasing standard. ASU 2018-11 allows an entity to elect not to recast its comparative periods in the period of adoption when transitioning to ASC 842 (the “Comparatives Under 840 Option”). Effectively, an entity would be permitted to change its date of initial application to the beginning of the period of adoption of ASC 842 (e.g., January 1, 2019, for a calendar-year-end PBE or January 1, 2022, for a calendar-year-end non-PBE). In doing so, the entity would:

Apply ASC 840 in the comparative periods.
Provide the disclosures required by ASC 840 for all periods that continue to be presented in accordance with ASC 840.
Recognize the effects of applying ASC 842 as a cumulative-effect adjustment to retained earnings as of the effective date (e.g., January 1, 2019, for a calendar-year-end PBE or January 1, 2022,3 for a calendar-year-end non-PBE); under the Comparatives Under 840 Option, this date would represent the date of initial application.

The entity would not:

Restate comparative periods for the effects of applying ASC 842.
Provide the disclosures required by ASC 842 for the comparative periods.
Change how the transition requirements apply, only when the transition requirements apply.

Therefore, an entity that elects the Comparatives Under 840 Option under ASU 2018-11 may find transition (as well as navigating the complicated concepts in this chapter) easier.

Connecting the Dots

Implementation Challenges Remain When the Comparatives Under 840 Option Is Used

Although the Comparatives Under 840 Option does not change how an entity applies the transition requirements, the lease-related balances recorded as of the effective date may still differ from the balances that would be remaining as of that date if comparative periods had been restated for the effects of applying ASC 842.

The Board expects that the new transition election will relieve entities from the cost burdens that are associated with restating comparative periods for the effects of applying ASC 842. However, many entities will still need to enhance their lease-related IT systems as a result of ASC 842’s data requirements. In addition, ASC 842’s requirements related to judgments and estimations have not changed, and new processes and internal controls will still need to be instituted accordingly. Therefore, we do not think that entities should slow their implementation efforts because of the issuance of ASU 2018-11.

Throughout this chapter, we use the phrase “date of initial application” to mean either of the following:

The beginning of the earliest comparative period presented — if the entity does not elect the Comparatives Under 840 Option.
The date on which the entity adopts ASC 842 — if the entity elects the Comparatives Under 840 Option.

See Section 16.11 for additional discussion of the transition disclosures related to ASU 2018-11 and Section 17.3.1.4.1 for further discussion of this additional transition method.

16.1.2 Adoption Timelines

16.1.2.1 PBE With a Calendar Year-End

Assumes no early adoption (and no election of the Comparatives Under 840 Option)

16.1.2.2 Non-PBE With a Calendar Year-End

Assumes no early adoption (and no election of the Comparatives Under 840 Option)

The above charts indicate the transition timelines for calendar-year-end PBEs and non-PBEs, respectively, with two comparative periods presented. Differences in assets and liabilities as of the earliest comparative period are recognized as a cumulative-effect adjustment in equity at such time. Lessors apply the modified retrospective transition approach similarly to how lessees apply it.

Connecting the Dots

Meaning of “Earliest Comparative Period Presented”

PBEs that present three years of income statements and statements of cash flows must prepare the balance-sheet effect of the adoption of ASC 842 as of January 1, 2017, even though they generally provide only two years of balance sheets in their financial statements. That is, PBEs need the balance sheet so that they can (1) prepare the income statement in the earliest year presented and a statement of cash flow reconciliation and (2) properly roll forward the balance sheet.

Modified Retrospective Transition Method Required

Because the FASB wanted to limit the number of potential transition methods that an entity could apply, full retrospective transition is not permitted; rather, the modified retrospective transition method is required. However, as discussed later in this chapter, the level of modification depends on the extent to which an entity elects optional practical expedients (see Section 16.5).

“Earliest Period Presented” for a Non-PBE’s Stand-Alone Financial Statements

While PBEs are subject to the SEC’s public-company reporting requirements, other entities may prepare single or multi-year comparative financial statements in accordance with their own reporting requirements. An entity that does not elect the Comparatives Under 840 Option must apply the modified retrospective transition approach to the earliest period presented in its financial statements. If a non-PBE is consolidated by a PBE, the PBE will technically have an “earliest period presented” that is different from (earlier than) the period in which the non-PBE will prepare financial statements for its users. Nonetheless, we believe that in the PBE’s consolidated financial statements, the PBE is required to determine its subsidiary’s lease balance as of the PBE’s earliest period presented. We do not believe that the FASB intended for the lease balances to be calculated as of multiple dates (one for the parent and one for the subsidiary) in the PBE’s consolidated financial statements.

Example 16-1

Roses Inc., a PBE that does not elect the Comparatives Under 840 Option, prepares its 2019 financial statements for which the earliest comparative period begins on January 1, 2017. One of its consolidated subsidiaries, Free LLC, prepares separate financial statements for which the earliest comparative period begins on January 1, 2018. Roses is required to determine its lease balances as of January 1, 2017, which include lease balances that roll up from Free. Further, it would be acceptable for Free to use the January 1, 2017, lease balances and roll forward the balances to January 1, 2018, for transition and disclosure purposes.

Footnotes

Public companies are PBEs, as well as certain not-for-profit entities and employee benefit plans as described above in ASC 842-10-65-1(a).

The deferral in ASU 2020-05 applied to public NFPs that had not issued financial statements or made financial statements available for issuance as of June 3, 2020. Public NFPs that have issued financial statements or have made financial statements available for issuance before that date must comply with the effective dates prescribed for public companies above.

In accordance with ASU 2020-05.

Confidential and Proprietary — for Use Solely by Authorized Personnel

This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.