Accounting for Leases Under ASC 842

This course provides comprehensive coverage of how to apply the provisions of ASC 842 from both the perspective of the lessee and the lessor. Among the features of the course materials are:

• ASC 842 navigation tool and catalog of examples
• Comprehensive examples of application to gross and net leases
• Tool for identifying lease components, non-lease components and non-components
• Model private company disclosure example
• White label, tailorable PowerPoint deck for presenting to clients, bankers, lawyers, sureties, prospects, referral sources and other interested parties

This course will enable participants to:

• Differentiate lease agreements with specified assets from service agreements that contain substantive substitution rights
• Determine the circumstances when a commercial contract contains an embedded lease that is to be accounted for separately under ASC 842 from the other contractual terms
• Apply the ASC 842 classification rules to determine the proper recognition, measurement, presentation and disclosure of leases of lessees and lessors
• Strongly encourage clients that do not have formal related party leases (that are under month-to-month arrangements) to execute formal leases with economically reasonable terms to avoid requirement to immediately amortize leasehold improvements in the month that such improvements are made
• Assist clients in implementing ASC 842 in the period it becomes effective including rendering advice regarding the various practical expedients available for transitioning entities
• Strongly encourage clients with extensive leas portfolios to: (a) properly plan and execute their implementation in a timely manner; and (b) avoid using spreadsheets due to the extent to which spreadsheets are error-prone and instead, obtain specialized software that is fit for purpose

Prerequisites: Basic knowledge of accounting for leases under former ASC Topic 840

Advance Preparation: None

Level of Instruction: Intermediate

CPE Credits and Field of Study: 8.0 CPE Credits in Accounting to be presented in either one full-day group live session or two virtual four-hour sessions *

* Topics, duration and the allocation of CPE credits between fields of study are subject to change to accommodate late-breaking developments.

Introductory Coverage

• Reasons for amendments to former lease accounting standard (context for standard)
• ASU 2016-02 Leases (ASC Topic 842)
  • Plethora of pre-implementation amendments by FASB
  • Reasons for single dissenting member of FASB
  • ASU navigation and research practice aid
  • Substantive difference between US GAAP and IFRS despite convergence efforts
  • Scope
  • Definition of right-of-use model and aspect derived from revenue standard
  • Does a contract contain a lease?
  • Flow diagram: Identifying a lease

Initial determination of right-of-use (ROU) asset

Componentization and allocation of contractual payments

Computing lease payments to be discounted at commencement

• What are in-substance fixed payments?
• Examples of in-substance fixed payments
• Treatment of real estate taxes, insurance and common area maintenance (CAM)
• Amounts excluded from discounted lease payments
• Lease components, non-lease components and non-components
• Guide to analyzing the elements of a contract
• Composition of lease payments: The amount discounted to present value
• Variable lease payments
• The land component

Lease accounting walkthroughs

• Finance leases
  • Initial accounting balance sheet
  • Subsequent accounting statement of income
  • Subsequent accounting statement of cash flows
• Operating leases
  • Initial accounting balance sheet
  • Subsequent accounting statement of income
  • Subsequent accounting statement of cash flows
• Numeric example: Lessee operating lease
  • At-lease-inception entries
  • Subsequent accounting in year one

Comparison of income statement treatment of operating leases under US GAAP with corresponding treatment under IFRS

Lease case study: Real estate lease

Required lessee disclosures example

Weighted average lease term and weighted average discount rate

When is remeasurement of the lease payments required

• Lease modification events and required reassessment
• Lease concessions due to COVID-19 pandemic

Case study: Reading and analyzing contracts

Operating lease comprehensive example

Related party leases

• Avoidance of month-to-month and year-to-year arrangements
• Consideration of VIE rules
• Oral vs. written

Short-term lease election

Impairment of the ROU asset

Adverse effects on loan covenant compliance

• Operating leases-adverse effects on leverage-related loan covenants
• FASB commentaries on adverse effects

Is the FASB ASC theoretically sound and consistent — Executory contracts

Client dialogue with banks and sureties

Other lessee-related matters covered in ASC 842

Income tax considerations for taxpaying lessees

Tools and software

Lease classification categories

• Operating
• Sales-type
• Direct financing

Variable lease payments

Initial direct costs (IDCs)

Sales-type leases

• Recognition
• Initial and subsequent measurement
• Derecognition
• Financial statement presentation

Direct financing leases

• Recognition
• Initial and subsequent measurement
• Derecognition
• Financial statement presentation

Operating leases

• Recognition
• Initial and subsequent measurement
• Financial statement presentation

Lease modifications

Lease terminations

Practical expedients

Lessor disclosures

Ongoing post-implementation review (PIR) process

Factile flash card review