What New Disclosures are Required Under ASC 842, IFRS 16 & GASB 87?
Future minimum payments were always a required disclosure under the old lease accounting standards. But now, under ASC 842, IFRS 16, and GASB 87 disclosures get more complicated than that. Here’s a list of some of the new disclosures required under the new standards for lessees:
Lease General Description Disclosure
Under the new standards qualitative disclosures are more extensive. First, lessees must disclose information about the nature of the company’s leases. This includes a general lease description or lease type (ex: real estate, equipment, etc.), basis on which variable lease payments are determined, terms & conditions of options to extend or terminate leases, lease restrictions or covenants, and residual value guarantees. Remember to include information about subleases, and leases that have not commenced yet.
Assumptions & Judgments
Companies must outline any significant assumptions or judgements made in identifying and treating leases. Explanations for the following are necessary: how contracts containing leases were identified, how allocation of consideration in a contract were made, and how the discount rate was determined.
Leases have a variety of options including renewal, expansion, termination, and purchase. Any applicable options must be outlined along with details of those options, exercise dates, and the likelihood of exercising the option. In the case of renewal, you must disclose any leases that auto-renew.
Short Term Lease Census
Many companies think that because a short-term lease is not reported on the balance sheet, no disclosure is required. However, if you exercise any short-term lease exemptions, you must disclose the amount of the lease expense associated to these short-term leases.
Financial Statement Values and Disclosures
The purpose of the new lease accounting standards is to more accurately represent a company’s true liabilities and leasing activities. Therefore, there are several new values that must be reported on financial statements. There is of course the right of use asset and corresponding lease liability (broken out between current and long term). However, this also includes all costs associated to leases: operating lease costs, finance lease costs (ASC 842), short-term lease costs, and variable lease costs. Additionally, income from subleases, net gains or losses from sale and leaseback transactions, cash paid for measurement of lease liabilities, supplemental non-cash information, weighted average remaining lease terms, and weighted average discount rates must all be disclosed.
To ease the transition for companies, the FASB and IASB issued several practical expedients and transition relief. If companies elect any of these expedients they must also be disclosed. For example, short-term lease exemption, separating lease components, election not to restate comparative periods upon adoption, and hindsight.
In addition to the major categories of disclosures above, additional detail is required like maturity analysis of liabilities, and lease transactions with related parties.
Often when a new accounting standard is implemented, disclosures are an afterthought. The result is a last-minute scramble to be in compliance with disclosure requirements. Instead, companies should think about disclosures early on their adoption process, and this should be a main consideration when selecting a technology platform. Make sure you collect the right information to support disclosures on the front end, so you are more prepared for reporting on the back-end. For more information on selecting lease accounting solutions, check out this article.
NetLease is a complete lease accounting and management tool developed to operationalize compliance with ASC 842, IFRS 16, and GASB 87 standards. It supports lease reporting throughout the entire lease lifecycle and includes functionality like push-button reporting for disclosures, full lease automation, integrated AP management, a robust audit trail, lease modification management and lease detail and document storage. Unlike other solutions on the market, NetLease is ready and currently deployed by public, private, and international companies.
About the authors:
Adam Riches, CPA is the Managing Partner at Netgain Solutions
Nathan Smart, CPA is a Partner at Netgain Solutions
For more information on automating your lease accounting, schedule a conversation with one of our CPAs.