18.1 SAB Topic 11.M Disclosures
The SEC staff has continued to emphasize the importance of providing investors
with disclosures that explain the impact that new accounting standards are expected
to have on an entity’s financial statements (“transition disclosures”).1 Such disclosures include information that investors may need to determine the
effects of adopting a new standard and how the adoption will affect comparability
from period to period. Transition disclosures should include not only an explanation
of the transition method elected (as discussed in Chapter 16) but also information about the
impact that the leasing standard is expected to have on an entity’s financial
statements. The SEC staff has highlighted that, in the past, transparent disclosures
about the anticipated effects of a new standard in multiple reporting periods
preceding its adoption have prevented market participants from reacting adversely to
significant accounting changes. In addition, the staff has indicated that it expects
to see robust qualitative and quantitative disclosures about (1) the anticipated
impact of new standards and (2) the status of management’s progress in
implementation as the adoption date of the new standard approaches. Registrants that
have not yet adopted the leasing standard, such as EGCs that have elected to use the
non-PBE effective date of ASC 842, should continue to focus on providing appropriate
disclosures in the periods leading up to adoption of the standard.
The SEC staff has also reiterated that a registrant should provide transparent
transition disclosures that comply with the requirements of SAB Topic 11.M and has
indicated that when a registrant is unable to reasonably estimate the quantitative
impact of adopting the leasing standard, the registrant should consider providing
additional qualitative disclosures about the significance of the impact on its
financial statements.2
There will not be a one-size-fits-all model for communicating the impact of
adoption, but entities could consider providing (1) a short narrative that
qualitatively discusses the impact of the change or, to the extent available, (2)
tabular information (or ranges) identifying the expected accounting under the
leasing standard, such as amounts or ranges of newly recognized ROU assets and
liabilities. The following are sample disclosures that an entity could provide about
qualitative aspects of the impact of adoption, depending on its specific facts and
circumstances:
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ASC 842 provides a package of transition practical expedients that allow an entity to not reassess (1) whether any expired or existing contracts contain a lease, (2) the lease classification of any expired or existing lease, and (3) initial direct costs for any existing lease. We expect to elect the package of transition practical expedients.
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As disclosed in note X, we currently have operating lease commitments of $X billion on an undiscounted basis. Upon adoption of ASC 842, we expect substantially all of these commitments will be recognized as ROU assets and liabilities, on a discounted basis.
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We [are implementing/have implemented] a new enterprise-wide lease accounting system and are [implementing/modifying] internal controls to address the collection, recording, and accounting for leases in accordance with ASC 842.
If an entity chooses to provide quantitative disclosures, it should consider
including information reflecting the entity’s selected transition method (i.e., the
modified retrospective method either as of the beginning of the earliest comparative
period or as of the beginning of the year of adoption by using the Comparatives
Under 840 Option — see Section
16.1.1), since stakeholders would benefit from perspective on the
overall impact of adoption as well as any opening adjustments to retained
earnings.
Footnotes
1
See SAB Topic 11.M.
2
This was announced by the SEC observer at the September 22,
2016, EITF meeting. See Deloitte’s September 22, 2016, Financial Reporting
Alert for additional information about the SEC
staff’s comments on transition issues.