16.6 Illustrative Examples — Transition Approaches
In summary, there are several potential
transition approaches an entity may select, some of which will affect lease
classification:
As discussed above, hindsight does not affect lease classification, when the
practical expedient package is also elected, but may have an impact on lease
measurement in transition. The examples below illustrate the potential impact of
these approaches on sample leases. These examples should be read in conjunction with
the guidance above and the “Modifications and Reassessment of Lease Liability in
Comparative Periods” discussion in Section 16.3.1. In all examples, assume that the entity is a
calendar-year-end public entity; the entity’s adoption date is January 1, 2019; the
entity did not elect the Comparatives Under 840 Option; and the entity’s earliest
comparative period presented is January 1, 2017.
Lease A | Transition Impact |
|---|---|
Lessee or Lessor? Lessee Lease Inception: February 10, 2015 Lease Commencement: February 14, 2015 Original Lease Term: 10 years ASC 840 Lease Classification: Operating
Other Terms: No renewal options or purchase
options | |
Approaches A and B | Retain the operating lease classification upon transition,
because the practical expedient package was elected. The
election of hindsight has no impact on lease term because
there are no renewal options to consider. |
Approaches C and D | Assess lease classification under ASC 842 as of the
commencement date of the lease (i.e., February 14, 2015).
The election of hindsight has no impact on lease term
because there are no renewal options to consider. |
Lease B | Transition Impact |
|---|---|
Lessee or Lessor? Lessee Lease Inception: February 10, 2015 Lease Commencement: February 14, 2015 Lease Term: Three years, exercise of renewal option not reasonably
assured as of lease inception ASC 840 Lease Classification: Operating Other Terms: One two-year renewal option, no purchase option; renewal
option was exercised in 2018 Previous ASC 840 Considerations: Upon renewal, the lease was also
classified as an operating lease under ASC 840 | |
Approach A | Retain the operating lease classifications in all periods
presented, because the practical expedient package was
elected. For measurement purposes, since hindsight was
elected, the renewal exercised in 2018 would be included
retrospectively, as if its exercise were reasonably certain,
in the measurement of the lease as of the earliest period
presented. |
Approach B | Retain the operating lease classifications in all periods presented, because the practical expedient package was elected. Do not alter ASC 840 accounting performed in 2018 other than to increase the lease liability and the ROU asset (because the renewal option is exercised). |
Approach C | Assess lease classification under ASC 842 as of the commencement date (i.e., February 14, 2015). Since hindsight is elected, the exercised renewal would affect lease term for both the ASC 842 classification test and the measurement of the lease as of the earliest period presented. |
Approach D | Assess lease classification under ASC 842 as of the commencement date (i.e., February 14, 2015). Since hindsight was not elected, the exercised renewal would not affect the original lease term as of lease commencement for the ASC 842 classification test. If lease classification did not change upon the adoption of ASC 842, do not alter ASC 840 accounting performed in 2018 other than to increase the lease liability and the ROU asset (because the renewal option is exercised). However, if the lessee concludes that the lease is a finance lease upon adopting ASC 842 (i.e., classification changed), all of the reassessment and subsequent-measurement guidance in ASC 842 should be applied during the comparative periods.
See “Modifications and Reassessment of Lease Liability” in Section 16.3.1 for more information. |
Lease C | Transition Impact |
|---|---|
Lessee or Lessor? Lessee
Lease Inception: February 10, 2015
Lease Commencement: February 14, 2015 Lease Term: 8 years ASC 840 Lease Classification: Capital
Other Information: The lessee and lessor modified
the terms of the contract so that the lessee would
pay less rent over the remaining lease term on
August 6, 2017
Previous ASC 840 Considerations: Modification
would have changed classification if the terms
were in effect as of the original lease inception;
new contract was deemed an operating lease as
of August 6, 2017 | |
Approaches A and B | Because the practical expedient package was elected, ASC
840 accounting should be retained in the comparative
periods. Therefore, the lessee should retain finance (capital)
lease classification as of the earliest comparative period
through the date of modification and retain operating
lease classification as of the modification date for the new
lease contract. Further, hindsight does not affect this fact
pattern because the modification only affected the amount
the lessee would pay, which had no effect on the lease
term. In addition, a modification should never result in an
adjustment to the lease balances in transition before the
modification date. |
Approaches C and D | Assess lease classification under ASC 842 as of the commencement date (i.e.,
February 14, 2015). The transition guidance is not
clear on situations in which the practical
expedient package is not elected and a
modification occurs during the transition period.
In accordance with the principles discussed in
Section 16.3.1, when lease
classification does not change upon the adoption
of ASC 842, the ASC 840 subsequent-measurement
guidance would be applied until the effective date
(i.e., January 1, 2019). However, this principle
appears incompatible with Approaches C and D,
because the practical expedient package was not
elected. That is, for a modification date of
August 6, 2017, an entity is required to perform
an additional lease classification determination
under ASC 842. We believe that there may be
multiple acceptable approaches to analyzing this
lease, including applying the ASC 842 modification
and reassessment guidance entirely under ASC 842
or a mixed model that takes into account relevant
concepts from both ASC 840 and ASC 842. If the lessee concludes that the lease is an operating lease at lease
commencement upon adopting ASC 842 (i.e., classification
changed), all of the ASC 842 reassessment and
subsequent-measurement guidance should be applied during the
comparative periods (see Section 16.3.2.2). Hindsight does not affect this fact pattern because the modification only affected the amount the lessee would pay, which had no effect on the lease term. In addition, a modification should never result in an adjustment to the lease balances in transition before the modification date. |
Lease D | Transition Impact |
|---|---|
Lessee or Lessor? Lessor Lease Inception: August 9, 2006 Lease Commencement: September 2, 2006 Lease Term: 12 years ASC 840 Lease Classification: Operating
Other Terms: The lessor and lessee modified the
terms of the contract for the lessee to extend the
lease for an additional five years on June 6, 2016 Previous ASC 840 Considerations: Modification changed classification to a
sales-type lease as of the modification date | |
Approaches A and B | Since the practical expedient package was elected (and
the classification changed before the earliest comparative
period presented), sales-type lease classification would
be retained upon adopting ASC 842. In addition, since the
extension occurred before the earliest period presented
and there are no lessee-controlled options after the earliest
period presented, the application of hindsight would not
have any impact on lease term at adoption. |
Approach C | Assess lease classification under ASC 842 as of the
modification date (i.e., June 6, 2016). In addition, since
the extension occurred before the earliest period presented
and there are no lessee-controlled options after the earliest
period presented, the application of hindsight would not
have any impact on lease term at adoption. |
Approach D | Assess lease classification under ASC 842 as of the
modification date (i.e., June 6, 2016). |
Lease E | Transition Impact |
|---|---|
Lessee or Lessor? Lessor
Lease Inception: August 9, 2006
Lease Commencement: September 2, 2006 Lease Term: 12 years ASC 840 Lease Classification: Operating
Other Terms: The lessor and lessee modified the terms of the contract for the lessee to extend the lease for an additional five years on June 6, 2018 Previous ASC 840 Considerations: Modification changed classification to a
sales-type lease as of the modification date | |
Approach A | Since the practical expedient package was elected, the lessor would not change
lease classification upon adopting ASC 842 (i.e.,
the lease would be an operating lease as of the
earliest period presented and the ASC 840
modification guidance would apply to the
modification of a sales-type lease). In addition,
although hindsight was elected, since the
extension was the result of a mutual negotiation
to modify and extend the lease (rather than a
lessee-controlled option to extend), the
application of hindsight would not have any impact
on lease term. |
Approach B | Since the practical expedient package was elected, the lessor would not change
lease classification upon adopting ASC 842 (i.e.,
the lease would be an operating lease as of the
earliest period presented and the ASC 840
modification guidance would apply to the
modification of a sales-type lease). |
Approaches C and D | Assess lease classification under ASC 842 as of lease commencement (i.e., September 2, 2006). In addition, even if hindsight was elected under Approach C, since the extension was the result of a mutual negotiation to modify and extend the lease (rather than a lessee-controlled option to extend), the application of hindsight would not have any impact on lease term. If lease classification did not change upon the adoption of ASC 842, the ASC 840
modification and subsequent-measurement guidance should be
applied (including the guidance on the assessment,
classification and measurement of the lease on June 6, 2018,
the date of the extension). If lease classification changed upon the adoption of ASC 842, all of the modification and subsequent-measurement guidance in ASC 842 should be applied during the comparative periods. |
Lease F | Transition Impact |
|---|---|
Lessee or Lessor? Lessee
Lease Inception: July 10, 2010
Lease Commencement: July 13, 2010 Lease Term: 10 years; the lessee has a 5-year renewal option for which
exercise was determined not to be reasonably assured as of
the inception date ASC 840 Lease Classification: Operating Other Information: On September 15, 2018, the lessee installs and pays
for tenant improvements with a useful life that extends
through 2025. The tenant improvements would be costly to
remove and, at that time, it is reasonably assured that the
lessee will exercise the renewal option. Previous ASC 840 Considerations: There are no
changes to the lease as a result of the exercise of
the renewal option becoming reasonably assured.
That is, there are no reassessment requirements
in ASC 840 other than modifications, extensions,
or renewals. | |
Approach A | Retain the operating lease classification in all periods
presented because the practical expedient package
was elected. We believe that, under this approach, lease
classification would not need to be reassessed as of the
effective date despite the change in facts and circumstances
before this date. However, for measurement purposes,
since hindsight was elected, the renewal would be included
retrospectively as if its exercise were reasonably certain
in the measurement of the lease as of the earliest period
presented. |
Approach B | Since the practical expedient package was elected, the
operating lease classification should be retained during
comparative periods. We believe that lease classification
would not need to be reassessed as of the effective date
despite the change in facts and circumstances before this
date. In accordance with ASC 842-10-35-1, lease term is
reassessed when an event “occurs.” However, because the
lessee elected the practical expedient package and did not
elect hindsight, we do not believe that the lessee should
consider events that occurred before the effective date but
did not result in a modification under ASC 840. |
Approach C | Assess lease classification under ASC 842 as of the commencement date (i.e., July 13, 2010). Since hindsight is elected, the change in facts and circumstances regarding the renewal would affect the lease term for both the ASC 842 classification test and the measurement of the lease as of the earliest period presented. If lease classification did not change upon the adoption of ASC 842, the ASC 840
subsequent-measurement guidance should be applied until the
effective date (i.e., January 1, 2019). However, if the lessee concludes that the lease is a finance lease at lease commencement upon adopting ASC 842 (i.e., classification did change), all of the reassessment and subsequent-measurement guidance in ASC 842 should be applied during the comparative periods. Therefore, in accordance with ASC 842-10-35-1, lease term is reassessed as of September 15, 2018, because an event occurred (installing leasehold improvements) for which reassessment was required under ASC 842 and that was controlled by the lessee. |
Approach D | Assess lease classification as of the commencement date (i.e., July 13, 2010). If lease classification did not change upon the adoption of ASC 842, the ASC 840 subsequent-measurement guidance should be applied until the effective date (i.e., January 1, 2019).
However, if the lessee concludes that the lease is a finance lease at lease commencement upon adopting ASC 842 (i.e., classification did change), all of the reassessment and subsequent-measurement guidance in ASC 842 should be applied during the comparative periods. Therefore, in accordance with ASC 842-10-35-1, lease term is reassessed as of September 15, 2018, because an event occurred (installing leasehold improvements) for which reassessment was required under ASC 842 and that was controlled by the lessee. |