With the effective date of the new lease guidance imminent for public entities, 1 the Financial Accounting Standards Board (FASB) considered modifications for some recently highlighted items. A 15-day exposure draft is expected shortly, and a final accounting standards update (ASU) planned for issuance in the first quarter of 2019 will address two issues:
- Fair value for lessors that are not manufacturers or dealers
- Statement of cash flows – Sales-type and direct financing leases
Special transition guidance applies due to the last-minute nature of these changes.
Fair Value for Lessors That Are Not Manufacturers or Dealers
Accounting Standards Codification (ASC) 840 previously provided guidance for determining fair value and its application to lease classification and measurement for lessors that are not manufacturers or dealers (qualifying lessors):
“If the lessor is not a manufacturer or dealer, the fair value of the property at lease inception ordinarily will be its cost, reflecting any volume or trade discounts that may apply. However, if there has been a significant lapse of time between the acquisition of the property by the lessor and lease inception, the determination of fair value should be made in light of market conditions prevailing at lease inception, which may indicate that the fair value of the property is greater or less than its cost or carrying amount, if different.”
As written, ASC 842 eliminated this fair value exception, which means that otherwise qualifying lessors would be required to recognize an expense for acquisition costs, i.e., sales taxes and delivery charges, at lease commencement while subsequently recognizing interest income for direct financing leases and sales-type leases that is significantly greater than that being recognized currently.
FASB approved restoring the fair value exception for qualifying lessors.
Statement of Cash Flows – Sales-Type & Direct Financing Leases
There currently is conflicting guidance in ASC 842 and ASC 942, Financial Services—Depository and Lending, for depository and lending lessors about how to present principal payments received from sales-type and direct financing leases.
FASB will amend ASC 842 to allow financial services lessors to continue their practice of reporting cash receipts from sales-type leases and direct financing leases in “investing activities.”
Effective Date & Transition
Because the expected release date of a final ASU is after the effective date of the new lease guidance, FASB has provided special transition terms. A delayed effective date will provide an education cycle on the changes and allow entities to make any needed system changes. These clarifications will be effective for all entities for reporting periods beginning after December 15, 2019. Early adoption will be permitted. Whenever adopted, the changes should be applied to the date an entity first applies ASC 842.
In implementing ASC 842, some captive finance and financial service entities may have missed these two changes from existing practice and may be able to adopt these soon-to-be-finalized amendments in first quarter financial statements.
Major overhauls of existing accounting guidance are not without unintended consequences or unforeseen implementation challenges. FASB has been proactive in addressing these issues in a timely manner. Below is a complete list of the subsequent amendments to ASC 842, Leases.
The adoption of ASC 842 will be complex and likely will require significant hours to correctly implement. BKD can help educate your team, provide implementation tools and assist with analysis and documentation. If you would like assistance in complying with the new leases standard, contact your trusted BKD advisor. BKD has prepared a library of BKD Thoughtware® on this issue. Visit our website to learn more.
1 A public entity is defined as any one of these:
- A public business entity
- A not-for-profit entity that has issued—or is a conduit bond obligor for—securities traded, listed or quoted on an exchange or over-the-counter market
- An employee benefit plan that files or furnishes financial statements to the SEC