Defining Lease Accounting Modified Retrospective

A lease accounting modified retrospective is a recording method. Lessees use this method after adopting the new lease accounting standard (ASC 842 or IFRS 16).. It is one of two reporting processes.

At the present time, an entity can either use the full approach or modified retrospective. In the full approach, entities adjust the balance sheet at the beginning of the earliest comparative period. Conversely, in the modified retrospective, entities “apply the new lease standard at [their] adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption.” 

Combined Component Method refers to the fact that entities are not required to separate non-lease components from associated lease components “by providing lessors with a practical expedient, by class of underlying asset.” Combined component is limited to non-lease components and components that fall under the new guidance rules. Specifically, where “(1) timing and pattern of transfer are the same for the non-lease components and associated lease components. And (2) the lease component, if accounted for separately, would be classified as an operating lease.”

When to begin applying a modified retrospective

At the start of 2017, few businesses had the software or processes in place to effectively handle the new standards. Consequently, most had to scramble to complete comparative financial statements. However, the new transition option available offered relief. Companies could opt to forgo comparative reporting requirements and simply comply with new lease accounting standards at the effective date rather than apply standards for the two years prior. ASC 842 compliance can be a complex initiative.