A lease accounting modified retrospective is a recording method used by lessees once the new lease accounting standard ASC 842 or IFRS 16 has been adopted. It is one of two reporting processes.
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. 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 earning in the period of adoption.” For more on the modified retrospective, see Finance Accounting Standards Board’s (FASB) Amendment No. 2018-11.
This means 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.” This is called the combined component method and is limited to non-lease components or components that fall under the new guidance rules 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, and most had to scramble to complete comparative financial statements. However, the new transition option available offered relief, and 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. See how CoStar lease management software can help push your lease accounting compliance goals across the finish line. Whether you see compliance as an opportunity to make a sweeping change to your lease accounting software system, or you want to plug into existing systems, CoStar offers two ways to integrate new software systems. We also offer expert implementation services and industry-leading data to make lease accounting compliance efficient and less complicated and your business more efficient.