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FASB Issues Improvements to Leases Standard for Lessor Financial Institutions

The FASB issued ASU 2019-01, Leases, ASC 842, Codification Improvements, to ease the application of certain aspects of the new leases guidance for certain industry groups, and also provides certain interim period disclosure relief for all entities. The ASU is available here and becomes effective for all entities for fiscal years beginning after December 15, 2019. Early adoption is permitted.

ASU Main Areas of Focus

The amendments in ASU 2019-01 address the following three specific areas of the new lease standard:

• Determining the fair value of the underlying asset by lessors that are not manufacturers or dealers
• Presentation on the statement of cash flows—sales-type and direct financing leases
• Transition disclosures related to ASC 250, Accounting Changes and Error Corrections

Issue #1: Determining the Fair Value of the Underlying Asset by Lessors That Are Not Manufacturers or Dealers

Removal of exception: ASC 842 requires lessors to apply the definition of fair value in ASC 820, which is the price that would be received to sell an asset in an orderly transaction between market participants, to determine the fair value of an underlying asset. This value is used to classify and eventually recognize and measure the net investment in a lease, when applicable. However, under the former lease standard, ASC 840, an exception is provided to lessors who are not manufacturers or dealers that generally permitted them to use the leased property’s acquisition cost as its fair value. That exception was not carried forward into the new lease guidance and applying the definition of fair value rather than using acquisition cost would have required those lessors to expense immediately certain acquisition costs (e.g., sales taxes and delivery charges) which they previously capitalized.

How did the amendments in ASU 2019-01 help? The ASU reinstates the previous exception: if a lessor is not a manufacturer or a dealer, the fair value of the underlying asset at lease commencement is its cost, reflecting any volume or trade discounts that may apply. Similar to ASC 840, if there has been a significant lapse of time between the acquisition of the underlying asset and lease commencement, the lessor must apply the ASC 820 definition of fair value.

Issue #2 Presentation for Lessors on the Statement of Cash Flows

Operating or Investing? ASC 842 requires lessors to present all cash receipts from leases within operating activities in the cash flow statement, which is a conflict for depository and lending institutions within the scope of ASC 942. Under ASC 942, depository and lending institutions should present principal payments received under leases within investing activities.  ASC 942 was not amended by ASC 842, however, ASC 842 does not delineate cash flow presentation for entities within the scope of 942. As such, conflicting guidance existed for depository and lending institutions on cash flow presentation for leases.

How did the amendments in ASU 2019-01 help? The ASU clarifies that lessors that are depository and lending institutions within the scope of ASC 942 should continue to present all principal payments received under leases within investing activities.

Issue #3 Transition Disclosures Related to ASC 250, Accounting Changes and Error Corrections

Accounting change disclosure exemption: ASC 842 refers entities to the transition disclosure requirements in ASC 250 for disclosures related to adoption of the new standard.  In addition, ASC 842 provided an exemption in the first annual period of adoption from the quantitative disclosure requirements in ASC 250, thereby removing the requirement to disclose the impact on certain financial statement line items. However, ASC 250 requires similar quantitative disclosure requirements for interim periods and ASC 842 did not provide a specific exemption for the interim disclosures.  Therefore, ASC 842 required interim disclosures in the year of adoption that were not required for the annual periods.

How did the amendments in ASU 2019-01 help? The ASU adds an exemption in ASC 842 from the interim quantitative disclosure requirements in ASC 250 in the year of adoption to apply the disclosure requirements consistently between annual and interim periods.

Effective Date and Transition Requirements

For public business entities, the amendments noted above in Issues 1 and 2 are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other entities, those amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted for all entities.  As the amendments in Issue 3 affect transition requirements only, there is no effective date.

Entities are required to apply the amendments in the ASU as of the first date they applied ASC 842 and using the same transition method used when adopting ASC 842 initially.