The new FASB lease accounting guidelines put operating leases front and center.
In preparing for the transition to the new lease accounting standard, most of the focus has been on the changes to the actual accounting for leases. In a nutshell, virtually all leases with terms over 12 months are required to be recognized on the balance sheet with an ROU asset and corresponding lease liability. For private companies, the deadline is January 2021.
But there’s another change within the 400-plus pages of FASB 842 that organizations also need to pay close attention to from the get-go.
And that’s the disclosure requirements under the new lease accounting standard.
Reporting entities should be aware that the new disclosure requirements have expanded significantly over the old guidance for both lessees and lessors. This increase in what’s required means you need to consider all the disclosures early in your implementation process--even before settling upon an automated lease accounting software solution.
Why did FASB increase the disclosure requirements?
In keeping with the overall objective of the new FASB lease accounting rules to bring transparency, insight and clarity to a company’s financial statements, the Board also revised what it expected entities to disclose regarding their leasing commitments.
According to FASB ASC 842, the disclosures should “enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.”
So to satisfy this objective, lessees (lessor disclosures will be discussed at a later date) must disclose information about their leases that’s both qualitative and quantitative as well as explanations about the assumptions used in the process.
In the absence of hard and fast “bright lines,” the new guidance allows a reporting entity to apply judgment when it comes to how much detail to include in its disclosures and how much emphasis each of the various requirements receives.
“A lessee shall aggregate disclosures so that useful information is not obscured by either the inclusion of a large amount of insignificant detail or by aggregating items that have different characteristics.” In other words, lessees should provide information that is neither extremely detailed nor overly high level but simply enough to present a straightforward understanding of its current and future leasing obligations.
Furthermore, the disclosures of companies with extensive leasing activities are expected to be more comprehensive than those of a company with fewer leases.
Before getting into the new disclosures for lessees, you should know that FASB eliminated some of the current disclosures:
- The total of minimum rentals that are to be received on noncancelable subleases in the future. This applies to both operating and capital leases as of the date of the financial statements.
- For each financial statement presented, the gross amount of assets recorded under capital leases by major classes.
- For sale-leaseback transactions when the seller-lessee applied the deposit or financing method, the future minimum lease payments and minimum sublease rentals aggregated at the date of the financial statements and for each of the five succeeding fiscal years.