ASC 842 Implementation Date Practical Expedients

Below we have summarized the practical expedients available for entities at their ASC 842 effective date to ease their transition to ASC 842. 

• Package of Three Practical Expedient

  • Definition:

    • An entity may elect the following practical expedients, which must be elected as a package and applied consistently by an entity to all of its leases (including those for which the entity is a lessee or a lessor), to leases that commenced before the effective date:

       

      1. An entity need not reassess whether any expired or existing contracts are or contain leases.

      2. An entity need not reassess the lease classification for any expired or existing leases. For example, all existing leases that were classified as operating leases in accordance with Topic 840 will be classified as operating leases, and all existing leases that were classified as capital leases in accordance with Topic 840 will be classified as finance leases.

      3. An entity need not reassess initial direct costs for any existing leases

       

  • Application:

    • An entity may elect the following practical expedients, which must be elected as a package and applied consistently by an entity to all of its leases (including those for which the entity is a lessee or a lessor), to leases that commenced before the effective date:

      1. An entity need not reassess whether any expired or existing contracts are or contain leases.

      2. An entity need not reassess the lease classification for any expired or existing leases. For example, all existing leases that were classified as operating leases in accordance with Topic 840 will be classified as operating leases, and all existing leases that were classified as capital leases in accordance with Topic 840 will be classified as finance leases.

      3. An entity need not reassess initial direct costs for any existing leases

      If this is not elected, the lease should be classified in accordance with the ASC 842 lease classification criteria and facts and circumstances as of the later of the (1) lease commencement date or (2) date the lease was last modified in accordance with ASC 840. If a lease was renewed or extended before the date of initial application, the renewal or extension date would be considered the lease commencement date for this purpose unless the renewal was assumed to be reasonably certain as of the initial lease commencement date. While this practical expedient alleviates some of the burden of transitioning to ASC 842, it does not allow for errors in assessing if a lease exists under 840 to be carried forward.

• Hindsight Practical Expedient
  • Definition:
    • Companies may elect to use hindsight when considering: 
      • Lessee options to extend or terminate the lease
      • To purchase the underlying asset
      • Assessment of  impairment of the entity’s right-of-use assets.

      This practical expedient may be elected separately or in conjunction with other practical expedients.

  • Application:

    • When performing its hindsight assessment, an entity must consider events and circumstances that occurred up to the effective date of ASC 842.

      This practical expedient may be elected separately or in conjunction with other practical expedients. However, most believe the“package of three” practical expedient has priority over the use-of hindsight practical expedient with respect to lease classification.

• Land Easements Practical Expedient
  • Definition:

    • For existing or expired land easements that were not previously accounting for in accordance with ASC 840, this practical expedient allows entities to elect not to assess whether those land easements are, or contain, leases in accordance with ASC 842 when transitioning to ASC 842.

      Land easements entered into (or existing land easements modified) on or after the effective date of ASC 842 must be assessed under ASC 842.

  • Application:
    • The transition practical expedient for existing land easements may be elected alone or with any of the other transition practical expedients. In a manner consistent with the other transition practical expedients, entities must disclose whether they are electing the transition practical expedient for land easements.

Accounting Guidance Reference:

• ASC 842-10-65-1
• Deloitte A Roadmap to Applying the New Leasing Standard (2020) 16.5.1, 16.5.2, 16.5.3