On March 5, 2019 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2019-01, Leases (Topic 842): Codification Improvements. The update includes amendments that address issues brought to FASB’s attention by stakeholders about implementation issues. The following points are addressed specifically in the update:
- Reinstatement of exemption for lessors that are not manufacturers or dealers in regards to determining fair value of a leased property;
- Presentation in the statement of cash flows – sales type and direct financing leases; and
- Clarified transition disclosures related to Topic 250.
For lessors who are not manufacturers or dealers, Topic 840 provided an explicit exception to the fair value guidance in ASC Topic 820, Fair Value Measurements when determining the fair value of leased property. This exception allowed lessors to determine fair value of an underlying asset as the asset’s cost, reflecting any volume or trade discounts that may apply. Stakeholders noted that this explicit exception did not carry forward to Topic 842, and therefore eligible lessors would be required to determine fair value as the price that would be received to sell the underlying asset in an orderly transaction between market participants at the measurement date. Stakeholders expressed concern that such measurement would not provide decision-useful information to users as certain costs would be expensed at lease commencement only to be recovered over the lease term as an increase to interest expense. The FASB concluded that it was not its intent to eliminate the fair value exception or to affect classification and measurement for qualifying lessors and therefore reinstated the fair value exception.
Amendments in the update also address conflicting guidance regarding the presentation of cash receipts from leases in the statement of cash flows. For sales-type and direct financing leases, Topic 840 does not provide guidance for presenting cash received from principal payments in the statement of cash flows. Lessors falling within the scope of Topic 942, Financial Services-Depository and Lending, have historically presented these receipts within investing activities based on illustrative guidance in Topic 942. Topic 842 provides specific guidance requiring all lessors to present cash received from leases within operating activities, which resulted in a conflict between the example in Topic 942 and required presentation guidance in Topic 842. Based on feedback received, the FASB amended Topic 842 and Topic 942 to provide guidance that depository and lending lessors should continue presenting cash receipts from principal payments in investing activities.
Lastly, the FASB clarified that it was not its intent to require the interim transition disclosures prescribed by ASC 250-10-50-3 in the ASC 842 transition disclosure requirements.
The effective date of ASU 2019-01 mirrors the effective date of Topic 842, including allowing for early application, and should be applied at the same time an entity first applies Topic 842.
Refer to our Leases page for the latest information regarding implementation dates.