Andrew W. Pidgeon
Professional Accounting Fellow, Office of the Chief Accountant
Washington D.C.
Dec. 10, 2018
The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This speech expresses my views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the staff.
Good morning. It is a pleasure to be here today to share certain Office of the Chief Accountant (OCA) activities related to the new leases standard ("Topic 842").[1] In the last year we have continued to be engaged in monitoring implementation of the new standard. In connection with those activities, I would like to share our responses to some of the Topic 842 consultations we have received.
The first consultation I am going to share builds upon a topic discussed last year at this conference by one of my colleagues related to lessee measurement of leases at transition to Topic 842.[2] Topic 842 requires lessees to measure leases at transition based on Topic 840[3] "remaining minimum rental payments."[4] My colleague noted that diversity in practice exists related to executory costs, and their inclusion in, or exclusion from, Topic 840 minimum rental payments. He further noted that the staff did not object to registrants consistently applying their historical accounting policy regarding the composition of minimum rental payments when concluding whether executory costs should be included in remaining minimum rental payments for purposes of establishing the lease liability in transition to Topic 842.
Earlier this year, we received a consultation regarding a registrant's ability to change its policies related to the composition of minimum rental payments, including a change at transition to Topic 842. For example, to change from excluding executory costs from, to including executory costs in, minimum rental payments. We observed that Topic 250[5] permits a registrant to change from one generally accepted accounting principle to another generally accepted accounting principle when there are at least two generally accepted principles if the change is preferable.[6] In response to the consultation, we communicated that the staff did not object to a registrant's application of Topic 250 to change its policy relative to the composition of Topic 840 minimum rental payments, including a change at transition to Topic 842.[7]
More recently, we received another consultation regarding minimum rental payments and lessee transition to Topic 842. That consultation, submitted by a group of registrants, related to the measurement of minimum rental payments that are based on an index or a rate ("indexed payments"). Specifically, the inquiry related to whether at transition to Topic 842 leases with indexed payments should be measured based on the index or rate value from lease inception, or the then current index or rate value.
Topic 840 requires lessees to disclose "future minimum rental payments."[8] We understand that in order to meet that disclosure requirement, some lessees disclose future minimum rental payments related to indexed payments based on the index or rate value at lease inception, and other lessees disclose those payments based on the current rate or index value. Similar to the consultation shared during last year's conference regarding the composition of minimum rental payments, we observed that Topic 840 does not provide specific guidance with regard to the measurement of future minimum rental payments for disclosure of indexed payments. Therefore, the staff did not object to a registrant consistently applying their Topic 840 accounting policy regarding the measurement of future minimum rental payments for disclosure when concluding whether remaining minimum rental payments should be calculated based on the lease inception or current index or rate values for purposes of measuring leases at transition to Topic 842.
Additionally, the consultation discussed a registrant changing its policy relative to the measurement of future minimum rental payments for indexed payments, including at transition to Topic 842. Specifically, the consultation discussed a change from using lease inception index or rate values, to using current index or rate values to measure future minimum rental payments. The consultation concluded that the change was a change in accounting policy subject to Topic 250. The staff did not object to that conclusion. The staff further communicated that when evaluating whether that policy change is preferable, it would be reasonable for a registrant to consider as part of its Topic 250 analysis, if the lease obligation that results from using current index or rate values represents a better measurement of the registrant's current lease obligations.
In addition to transition questions, we have received application questions related to the new leases standard, including questions regarding lessee and lessor accounting for certain costs relating to a lease.
The first of those application questions related to lessee accounting for costs incurred to place a leased asset into use. For example, a lessee may pay a party other than the lessor to ship a leased asset to the lessee's premises. Topic 360 would require capitalization of those costs if the lessee purchased the asset.[9] Since the asset is leased, not purchased, the lessee could determine that the costs are in the scope of other GAAP,[10] or it could determine recognition in current period earnings is appropriate. In lieu of recognizing those costs in current period earnings, the staff did not object to a lessee, as an accounting policy election, analogizing to Topic 360 to capitalize costs incurred to place a leased asset into its intended use.
The second lease cost consultation related to lessor accounting for costs incurred to fulfill its obligations under a lease. For example, a lessor may incur costs to transport a leased asset to the lessee. If the specific lessor costs are not within the scope of other GAAP, and to the extent the costs would qualify for deferral if the lease was within the scope of Topic 606,[11] in lieu of recognizing those costs in current period earnings, the staff did not object to a lessor's analogy to Subtopic 340-40 as an accounting policy election.
I encourage lessees and lessors that elect to apply either of those accounting policies to apply the policies consistently, and include appropriate disclosure of those policies if material.
Thank you for your time and attention.
[1] Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic No. 842, Leases.
[2] Michael P. Berrigan, Professional Accounting Fellow, Office of the Chief Accountant, U.S. Securities and Exchange Commission, Remarks before the 2017 AICPA Conference on Current SEC and PCAOB Developments (December 4, 2017), at: https://www.sec.gov/news/speech/berrigan-aicpa-2017-conference-sec-pcaob-developments.
[3] FASB ASC Topic No. 840, Leases ("Topic 840").
[4] ASC 842-10-65-1(l).
[5] FASB ASC Topic No. 250, Accounting Changes and Error Corrections ("Topic 250").
[6] ASC 250-10-45-2(b).
[7] Registrant requirements related to accounting policy changes are identified in Rule 10-01(b)(6) of Regulation S-X; see also, ASC 250-10-S99-4 and the related guidance in SAB Topic 6.G.2.b, Reporting Requirements for Accounting Changes.
[8] ASC 840-20-50-2(a).
[9] FASB ASC Topic No. 360, Property, Plant, and Equipment ("Topic 360"); specifically, ASC 360-10-30-1 states, in part, "… [t]hat the historical cost of acquiring an asset includes the costs necessarily incurred to bring it to the condition and location necessary for its intended use. …"
[10] For example, costs incurred by a lessee could require deferral pursuant to FASB ASC Subtopic No. 340-40, Other Assets and Deferred Costs – Contracts with Customers ("Subtopic 340-40"), or capitalization pursuant to Topic 360, if the leased asset is used by the lessee to deliver goods or services to a customer, or to construct property for the lessee, respectively.
[11] FASB ASC Topic No. 606, Revenue from Contracts with Customers ("Topic 606").