ASC 842 lessor clarifying amendments

The FASB on March 5, 2019, released Accounting Standards Update 2019-01, Codification Improvements, which is intended to clarify implementation of ASC 842 lease accounting for lessors. In general, the update doesn't break new ground; instead, it affirms that methods used in FAS 13 (ASC 840) still apply under ASC 842.

1) For lessors that are not manufacturers or dealers, under normal circumstances the fair value of the asset should be their cost (including any volume or trade discounts). They do not need to apply ASC Topic 820, Fair Value Measurement, which is a more involved process. This is consistent with previous practice under FAS 13/ASC 840. ASC 820 does need to be used if a significant period of time lapses between purchase and lease of the asset. One implication of this is that sales taxes and delivery charges are included in the fair value; they would not be under ASC 820. Lessors argued that the all-inclusive price better reflects their business model, and their belief that it wasn't the Board's intent to make a change. The Board concurred.

2) There was a conflict between ASC 842 and ASC 942, Financial Services--Depository and Lending, regarding the classification of principal payments for sales-type and direct financing leases on the cash flow statement. ASC 942 calls for such payments to be considered investing activities, while ASC 842 includes all cash receipts from leases in operating activities. Lessors covered by ASC 942 expressed a preference for its presentation. The Board agreed, and "lessors that are depository and lending institutions within the scope of Topic 942 will present all “principal payments received under leases” within investing activities." (ASU 2019-01 summary, issue 2)

3) ASC Topic 250 describes disclosures required due to accounting changes. ASC 842 exempted entities from certain transition disclosures otherwise mandated by 250-10-50-1(b)(2), but didn't address a similar requirement for interim periods in 250-10-50-3. This is now made consistent; there's no requirement to disclose in an interim period what doesn't need to be disclosed in the annual report.

Issues 1 & 2 are required for fiscal 2020 (years starting after 12/15/19) for all entities; private firms don't have to apply them to interim periods until fiscal 2021. Issue 3 is related to transition, so it applies whenever the transition is effected. Since it's a reduction in requirements, there's no need for time to implement. Earlier implementation is encouraged.

We will make an update to EZLease, lessor edition, in the next month to implement issue 2. No changes to the software are required for issues 1 & 3.