LEASER of Two Evils  

In our fifth installment of our lease series, we cover accounting alternatives and policies. As Aristotle wrote, “the lesser evil can be seen in comparison with the greater evil as a good, since this lesser evil is preferable to the greater one.” It is a stretch to say that Leases (Topic 842) is evil, but it does create additional complexity to accounting for leases.

Thankfully, the Financial Accounting Standards Board (FASB) has provided relief through practical expedients to ease certain complexities. Below are some accounting alternatives from a private company perspective.

The modified retrospective requires recasting all years presented, while the alternative approach allows for only adjusting in the period of adoption, which would be calendar year end 2022 for most entities.

Hindsight

In addition, in the year of adoption, an entity can elect to adopt the practical expedient to use hindsight in determining lease term and to assess impairment of the entities right-of-use (ROU) assets.

Triple Play – Package of Three Expedients

The following practical expedients, if adopted, must me adopted as a package. If elected, this package allows an entity upon adoption to not reassess the following:

• Whether any expired or existing contracts are or contain leases
• The lease classification for any expired or existing leases
• Initial direct costs for any existing leases

Most entities are expected to adopt this package.

Short-Term Lease Exception

Entities can elect to not capitalize short-term leases and exclude them from the balance sheet as a ROU asset. Short-term leases are leases that are less than 12 months without a purchase option that the lessee is likely to exercise. Please note, consideration of the lease term is applied at the commencement date of the lease.

Combining Lease and Nonlease (Service) Components at Transition  

Lessees can elect the practical expedient by underlying asset class, to not separate nonlease components from lease components. They would then account for each separate lease component and the nonlease components associated with that lease component as a single lease component. This results in the combined lease component payments being used for measuring the lease payments for the finance lease present value test.

In addition, in our previous blog Lease Common Denominator we discussed discount rate options.

There are other finer points and elections to consider. The above is intended to cover some of the larger rocks as you consider lease matters.

In our next blog of this series, we bring the series to close with final thoughts. As always, let us know if we can be of any help!