By Amy Leisinger, J.D.
The Financial Accounting Standards Board has issued an Accounting Standards Update to address concerns raised by stakeholders in the transitional period leading up to implementation of FASB’s new leases standard. The ASU aligns the guidance for fair value of an underlying asset by a lessor that is not a manufacturer or dealer with that of existing guidance and requires lessors within the scope of Topic 942, Financial Services—Depository and Lending, to present all “principal payments received under leases” within investing activities. The ASU also exempts both lessees and lessors from having to provide certain disclosures in the fiscal year when the new leases standard is adopted.
“The changes will help ensure a smoother transition to the standard without affecting the quality of information provided to investors and other financial statement users,” FASB Chairman Russell G. Golden said.
Fair value. FASB notes that there is an exception for lessors who are not manufacturers or dealers for determining fair value of leased property (the underlying asset in connection with leases standard) as the asset’s cost, reflecting any volume or trade discounts that may apply. Topic 842, Leases, did not carry forward this exception, and lessors previously qualifying for the exception are now required to apply the Topic 820 fair value standard, the exit price. The ASU reinstates the exception in Topic 842 for lessors that are not manufacturers or dealers and allows lessors to use cost for fair value. The ASU provides, however, that if too much time has passed between acquisition and lease commencement, lessors will be required to use exit price instead.
Cash flow statements. According to FASB, Topic 840 does not provide guidance on how cash received from sales-type and direct financing leases should be presented in cash flow statements. Stakeholders told FASB that lessors within the scope of Topic 942, Financial Services—Depository and Lending, have presented “principal payments received under leases” within investing activities and hoped to continue this practice. However, Topic 842 introduced guidance requiring all lessors to present all cash receipts from leases within operating activities, creating a conflict on the presentation of “principal payments received from leases” under certain leases. The ASU clarifies that depository and lending institutions that are lessors within the scope of Topic 942 will present all “principal payments received under leases” within investing activities under current practice.
Transition disclosures. Topic 842 requires lessees and lessors to provide transition disclosures upon adoption of the new leases standard and did not explicitly exempt entities from applying a requirement to provide identical disclosures for interim periods after the date of adoption. The ASU clarifies FASB’s original intent to exempt both lessees and lessors from having to provide certain interim disclosures in the fiscal year in which the new leases standard is adopted.