ASC 842 Practical Expedients and How to Manage Them

How ASC 842 Lease Accounting Practical Expedients Came to Be

FASB amended the new ASC 842 leases standard to provide lease accounting practical expedients in response to the major challenges reported associated with lease accounting compliance. The concerns reported by stakeholders were about two main issues. Firstly, there can be difficulty when defining standalone selling prices for lease and non-lease components that are not sold separately. Secondly, the significance of data regarding the separate components to users of the financial statements.

Options Available to Lessees

ASC 842 calls for lessees to separate lease components from non-lease components, using only the lease components in calculating the lease liability and right of use asset. This is easy in the case of net leases, where non-lease components are invoiced separately.

In the case of gross leases and modified gross leases, where some or all of the non-lease components are included in rent, separation of components is still required, although it may be difficult. Lessees may apply a practical expedient to not separate the components.

This election is made by the class of underlying assets and must then be applied to all leases in the class. The expedient makes the management of leases easier, but it does result in higher liability and asset balances. Entities should therefore consider the impacts carefully before taking the expedient.

Required Criteria for this new option:

Electing this practical expedient is a commitment. Any lessee that chooses the practical expedient for an asset class is required to apply it consistently to all eligible non-lease components in that class. In other words, a lessor cannot selectively apply this classification method.

Additional practical expedients are available for common control leases for privately held entities. These apply to interpretation of the terms of the contract, and to amortization of leasehold improvements. This practical expedient is applied on an individual basis. Another practical expedient is available for leases impacted by interest rate reform under ASC 848.

Whether a business opts in or out of the practical expedient available for lease accounting compliance, choosing a proven lease accounting and lease management software from CoStar allows you to manage leases in the manner that best suits company practices and process. Reach out today for a demo and pricing from the team at CoStar Real Estate Manager.