A short-term lease meets the following criteria
- A lease that, at the commencement date, has a term of 12 months or less, and
- Does not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise.
On the other hand, the accounting for leases for lessors is largely consistent with the previous guidance. Since leasing is a revenue-generating activity for lessors, updates to the lessor model were implemented to make it consistent with ASC 606, Revenue from Contracts with Customers, and new the lessees model.
Scope
ASC 842 applies to all leases, including subleases, except for short-term leases (as discussed above) and certain other arrangements that are covered under a different accounting topic:
- Leases of intangible assets (ASC 350, Intangibles – Goodwill and other)
- Leases of biological assets, including timber (ASC 905, Agriculture)
- Leases of inventory (ASC 330, Inventory)
- Leases of assets under construction (ASC 360, Property, Plant and Equipment)
- Leases to explore for or use non-regenerative resources such as minerals, oil and natural gas (ASC 930 or 932)
Consequently, it’s apparent that ASC 842 is limited to leases and subleases of the property, plant and equipment.
As all assets and liabilities arising from leases, including subleases, are recognized, it is therefore important, among other things, to address the following:
- Identifying the population of the leases, including embedded leases. Lease contracts could be embedded in a service or any other contract containing a ROU of any property, plant or equipment.
- Understanding requirements under the new standard.
- Understanding transition methods available as of the date of adoption: the full retrospective method (apply new lease standard at the beginning of earliest period presented) or modified retrospective method (apply new lease standard at the beginning of year of adoption).
- Understanding the practical expedients available under ASC 842. Election of appropriate practical expedients as an accounting policy for transition from ASC 840 to ASC 842 can be both efficient and make the adoption less cumbersome. Similarly, practical expedients (e.g., not combining lease and non-lease components available for existing, new and modified leases) can be elected to implement the new lease standard effectively.
- Selection of tool/template solutions for the adoption or implementation.
- Understanding if a new or modified contract, as of or after the date of adoption of ASC 842, is a lease contract under ASC 842, which is different from a supply or service contract. A contract merely labeled as a lease contract doesn’t mean it meets the definition of a lease contract under ASC 842.
- Understanding discount rates that can be used: implicit rate, incremental borrowing rate or risk-free rate.
Implementation of the new lease standard can be challenging. Mazars can help with the adoption of ASC 842. Contact us to learn more.
