The amendments in ASU 2018-12 are effective for public companies for fiscal years beginning after Dec. 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 2021. Early adoption is permitted.
ASU 2018-11, Leases (Topic 842), Targeted Improvements
Accounting Standards Update (ASU) No. 2018-11, Leases (Topic 842): Targeted Improvements, added a simplified transition method in implementing ASU 2016-02, and for lessors, provides a practical expedient for the separation of non-lease and lease components.
Additional Transition Method
The new transition method allows entities to initially apply new lease accounting under ASU 2016-02 at the adoption date (Jan. 1, 2020 for most calendar year-end private entities) instead of at the earliest comparative period present in the entity’s financial statements, and to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.
As an example, if an entity adopts this transition method on Jan. 1, 2020, and presents comparable financial statements (2020 and 2019), the entity will present its 2020 financial statements using the new lease accounting provisions (Topic 842, Leases) and present its 2019 financial statements using previous guidance (Topic 840, Leases). It is important to note that existing financial statement disclosure requirements would still be required in the year of adoption, if this transition method is elected.
Lessor Accounting – Separating Components of a Contract
In addition to the new transition method above, ASU 2018-11 provides lessors with a practical expedient, by class of underlying asset, to not separate non-lease components from the associated lease component, similar to the expedient provided for lessees. This aligns lessee and lessor accounting more closely.
However, the lessor practical expedient is limited to circumstances in which the non-lease component otherwise would be accounted for under the new revenue standard (Topic 606, Revenue from Contracts with Customers), and both of the following are met:
- The timing and pattern of transfer of the non-lease component and associated lease component are the same
- The lease component, if accounted for separately, would be classified as an operating lease
If the non-lease component associated with the lease component is the predominant component of the combined component, an entity is required to account for the combined component in accordance with Topic 606, Revenue from Contracts with Customers. Otherwise, the entity must account for the combined component as an operating lease in accordance Topic 842, Leases.
For example, it is common for a building lease to include common area maintenance services (a non-lease component). The payments for these services are often based on actual amounts expended by the lessor and therefore are considered variable payments, which are excluded from the definition of lease payments in Topic 842, Leases, meaning that the non-lease component would be accounted for under Topic 606, Revenue from Contracts with Customers. The pattern of transferring the right to use the building occurs over time throughout the lease term. The pattern of transferring the services for common area maintenance generally occurs over time, as the lessee benefits from the services throughout the lease term. As a result, the practical expedient can be adopted and both the lease and non-lease component will be combined into one single component.
An entity that elects the lessor practical expedient is required to disclose the following by class of underlying asset:
- The fact that it elected the expedient
- Which class(es) of underlying assets the lessor made the election to
- The nature of the lease component and nonlease component(s) that were combined as a result of applying the practical expedient and any nonlease components that were not eligible for the practical expedient and, thus, not combined
- The Topic the entity applies to the combined component (Topic 606 or Topic 842)
Effective Date and Transition
For entities that have not adopted Topic 842, Leases before the issuance of ASU 2018-11, the effective date and transition requirements for the amendments in ASU 2018-11 related to separating components of a contract are the same as the effective date and transition requirements in ASU 2016-02. ASU 2016-02 is effective for fiscal years beginning after Dec. 15, 2018 for most nonpublic entities.
For entities that have adopted Topic 842, Leases before the issuance of ASU 2018-11, the transition and effective date of the amendments related to separating components of a contract in ASU 2018-11 are as follows:
- The practical expedient may be elected either in the first reporting period following the issuance of ASU 2018-11 or at the original effective date of ASU 2016-02 for that entity
- The practical expedient may be applied either retrospectively or prospectively
All entities, including early adopters that elect the practical expedient related to separating components of a contract in ASU 2018-11 must apply the expedient, by class of underlying asset, to all existing lease transactions that qualify for the expedient at the date elected.
ASU 2018-10, Codification Improvements to Topic 842, Leases
Accounting Standards Update (ASU) No. 2018-10, Codification Improvements to Topic 842, Leases (ASU 2018-10), makes 16 technical corrections to ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02 or Topic 842, Leases) and other accounting topics, with the intention of alleviating unintended consequences from applying the new standard.
The amendments address the rate implicit in the lease, impairment of the net investment in the lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase options, variable payments that depend on an index or rate and certain transition adjustments, among other various updates.
Most importantly, ASU 2018-10 does not make any substantive changes to the core provisions or principles in the new standard.