Alert: FASB Accounting Standards Update No. 2018-11 – Targeted Improvements to Leases

Category: US GAAP

Alert: FASB Accounting Standards Update No. 2018-11 – Targeted Improvements to Leases

On July 30, 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-11 Leases: Targeted Improvements, to make amendments to Accounting Standards Update No. 2016- 02 Leases(Topic 842). The amendments provide an optional transition relief to entities for comparative periods reporting and an accounting policy choice to the lessors to not separate the lease and non-lease components of a contract, if certain conditions are met. Specifically, the ASU discusses the following:

Transition Relief – Comparative Reporting at Adoption

Topic 842 requires entities to use a modified retrospective transition method on initial application, to be implemented at the beginning of the earliest comparative period presented in the financial statements.

The ASU provides an optional transition method under which an entity will:

  • Initially apply Topic 842 only to the current period at the adoption date;
  • Present the comparative periods and provide related disclosures in the financial statements in accordance with Topic 840 Leases; and
  • Recognize a cumulative-effect adjustment of Topic 842 adoption to the opening balance of retained earnings in the period of adoption.

Lessor Relief – Separating Components of a Contract

Topic 842 requires entities to separate the lease and non-lease components of a contract and account for each component under the relevant accounting guidance. Lessees were given a practical expedient to make an accounting policy choice, by class of underlying asset, to account for lease and non-lease components as a single lease component.

The ASU expands the practical expedient to lessors, to account for these components as a single component only if the non-lease components would otherwise be accounted for under Topic 606 Revenue from Contracts with Customers, and meet the following criteria:

  • The timing and pattern of transfer of the non-lease component(s) and associated lease component are the same; and
  • The lease component, if accounted for separately, would be classified as an operating lease.

If the non-lease components are predominant, an entity is required to account for the combined component under Topic 606. Otherwise, the entity shall account for the combined component as an operating lease under Topic 842.

The lessor, electing for this expedient, is also required to make the following additional disclosures:

  • The fact that the lessor elected the practical expedient;
  • The classes of impacted underlying assets;
  • The nature of the lease and non-lease components that were combined and the nature of non-lease components that were not eligible for the practical expedient; and
  • The Topic the lessor applies to the combined component (Topic 606 or Topic 842).

Effective Date and Transition Requirements

For entities that have not adopted Topic 842 prior to the issuance of this ASU, the amendments in this ASU have the same effective date and transition requirements as the Topic 842.

Entities that have adopted Topic 842 prior to the issuance of this ASU have an option to apply it in the first reporting period following the issuance or at the original effective date of Topic 842 (i.e. January 1, 2019). The practical expedient may be applied either retroactively or prospectively.

All entities, opting to apply the practical expedient, must apply it to all existing lease transactions that qualify for the expedient by class of underlying assets.

To access the full script of ASU No. 2018-11, click here.

This communication contains a general overview of the topic and is current as of July 30, 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.