Alert: FASB Accounting Standards Update No. 2018-01 – Leases

Category: US GAAP

Alert: FASB Accounting Standards Update No. 2018-01 – Leases

On February 25, 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02 Leases (Topic 842). The ASU seeks to enhance transparency and comparability among entities by requiring the recognition of lease assets and liabilities and disclosure of key information regarding leasing arrangements.

In connection with the FASB’s transition support efforts, on January 25, 2018, it issued ASU No. 2018-01 Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842. The ASU introduces an optional transition practical expedient that provides entities with relief from the Topic 842 requirement to evaluate existing or expired land easements that were not previously accounted for as leases under the current leases guidance in Topic 840. If the practical expedient is not elected, the entity will be required to evaluate all existing or expired land easements to determine whether they meet the definition of a lease under Topic 842. Alternatively, if the expedient is elected, the entity is only required to evaluate new or modified land easements under Topic 842 prospectively (i.e., beginning at the date of initial adoption of Topic 842).

The lease project commenced as a joint project with the International Accounting Standards Board (IASB). Therefore, many of the requirements in Topic 842 are consistent with the requirements in IFRS 16 Leases as issued by the IASB in January 2016. However, there are some key differences, particularly related to certain aspects of the lessee accounting model, between the new leases standard under US GAAP and IFRS.

The main changes to US GAAP are as follows:

  • A lessee must recognize lease assets and liabilities for all leases.
    • The liability represents the obligation of the lessee to make lease payments and the asset represents the lessee’s right to use the underlying asset over the lease term.
  • An accounting policy choice exists that permits a lessee to elect not to recognize lease assets and liabilities for leases with a term of 12 months or less.
    • If an election is made, the lease is recognized as lease expense usually on a straight-line basis over the lease term.
  • Alignment of certain terms within the lessor accounting guidance with those that were changed as a result of the changes to the lessee accounting guidance.
  • Alignment of the lessor accounting model with the revenue recognition guidance in Topic 606 Revenue from Contracts with Customers, such as:
    • The concept of the transfer of control in an asset.
    • There is no longer any differentiation between leases of real estate assets and leases of other assets.
    • A sale and leaseback transaction only applies if the transfer of the asset meets the requirements for a sale in Topic 606.
  • The accounting model for leveraged leases doesn’t apply to those leveraged leases that commence after the effective date of Topic 842.
  • Amendment to the definition of a lease to reflect that the critical determination is whether a contract is or contains a lease rather than whether the lease is an operating vs. capital lease.
  • Addition of an accounting policy choice not to separate lease and non-lease components.
    • If an election is made, the non-lease components are accounted for together with the related lease components as one single component.
  • Additional guidance on how to identify and separate lease from non-lease components.
  • Additional disclosure (quantitative and qualitative) to allow financial statement users to assess the amount, timing and uncertainty of cash flows arising from leases.

The amendments under both ASU No. 2016-02 and 2018-01 are effective for fiscal years beginning after December 15, 2018, including interim periods therein, for the following:

  • A public business entity.
  • A not-for-profit 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.
  • An employee benefit plan that files with the US Securities Exchange Commission (SEC).

For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods therein. Early application is permitted for all entities. If the amendments in ASU No. 2016-02 were early adopted, the amendments in ASU No. 2018-01 should be applied upon their issuance.

At transition, Topic 842 requires leases to be recognized and measured at the beginning of the earliest comparative period presented using a modified retrospective method. The modified retrospective method offers a number of optional practical expedients that allow an entity to continue to follow the previous GAAP for leases that commenced before the effective date of Topic 842, with the following exceptions:

  • If there is a modification to a lease, the new requirements within Topic 842 must be followed as at the effective date of the modification.
  • A right-of-use asset and lease liability must be recognized by a lessee for all operating leases at each reporting date, calculated as the present value of the remaining minimum rental payments tracked and disclosed under previous GAAP.

To access the full script of ASU No. 2016-02, click here.

To access the full script of ASU No. 2018-01, click here.

This communication contains a general overview of the topic and is current as of February 5, 2018. The application of the principles addressed will depend upon the particular facts and circumstances of each individual case. Accordingly, this publication is not a substitute for professional advice and we recommend that any decisions you take about the application or not of any of the information presented be made in consultation with a qualified professional, who can address any variance that may be required to reflect your circumstances. Please contact your local MNP representative for customized assistance with the application of this material. MNP LLP accepts no responsibility or liability for any loss related to any person's use of or reliance upon this material. © MNP LLP 2018. All rights reserved.

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Michelle Balmer

Michelle Balmer CPA, CA

Vice President, Assurance

Michelle Balmer, CPA, CA, is a Senior Assurance Services Partner with MNP. With 14 years of experience in public practice, Michelle helps a broad range of public and privately held companies in a variety of industries. She also works on special projects, including costing studies, benchmarking and best-practice studies, operational analyses, litigation support and due diligence.

As a key member of MNP's Assurance team, Michelle has played an instrumental role in assurance policy development, implementing accounting and assurance standards firm-wide and educating assurance practitioners regarding methodologies and new pronouncements. She also provides technical advice and consultation on accounting and assurance issues, as well as on rules of professional conduct issues, to all MNP practitioners.

Michelle was certified a Chartered Accountant (CA) after obtaining a Bachelor of Commerce degree from the University of Alberta. She has been actively involved with the Institute of Chartered Accountants of Alberta, including the Chartered Accountants School of Business, in an instructional and marketing capacity. An avid volunteer, she has assisted numerous groups such as the Easter Seals of Alberta, Paralympic Sports Association and Junior Achievement of Northern Alberta.