For many entities, this optional method could significantly simplify the transition to the new lease accounting standards in the year of adoption.
In January 2018, the Financial Accounting Standards Board (FASB) issued an exposure draft that provided targeted improvements to ASU 2016-02 Leases (Topic 842). It included proposed changes to two requirements for the new lease standard:
- Transition — comparative reporting for initial adoption
- Separating components of a contract
On March 7, 2018, the FASB approved the changes to the comparative reporting transition guidance, providing an optional transition method when adopting Topic 842. The FASB plans to discuss the proposed amendments related to separating the components of a contract later in the spring. If approved, these amendments will provide lessors with a practical expedient option to combine lease and non-lease components under certain conditions.
The effective date and transition requirements for the amendment are the same as ASU 2016-02. Early adoption is permitted.
An additional transition option for Topic 842
Entities will now have an additional transition option when adopting Topic 842 that will allow them to initially apply the requirements of the standard retrospectively. This can be done through a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.
This improvement means entities are no longer required to apply the new standard (including disclosure requirements) to comparative periods presented. Those periods can continue to be presented in accordance with current generally accepted accounting principles, which could significantly simplify the transition in the year of adoption.
Initial transition method still available
The initial transition method included in ASU 2016-02 is still available, so entities can initially apply the requirements of Topic 842 retrospectively to each prior reporting period presented in the financial statements.
The cumulative effect of initial application is recognized at the beginning of the earliest comparative period presented. Under this transition method, none of the comparative periods presented would reflect the provisions of Topic 840.
Effective date for lease accounting standards
The effective date and transition requirements for the amendment are the same as ASU 2016-02. Early adoption is permitted.
Public entities
Annual reporting periods beginning after December 15, 2018.
Note: Public entities include a nonprofit 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.
Non-public entities
Annual reporting periods beginning after December 15, 2019.
How we can help
At CLA, we know it may be challenging to adopt the new lease accounting standards. We can help you understand how these reporting changes will impact your organization and assist you with a smooth transition to ASC 842.