Your Leasing Questions Answered (article)
Accounting for leases is changing. Beginning in 2019 for public business entities and 2020 for private companies, the new leasing standard will require most operating and finance leases to be recorded on the balance sheet. It also expands the definition of a lease and adds disclosure and presentation requirements. The following may help simplify the implementation process.
Can I use a portfolio approach to transition leases?
Leases can be evaluated and recorded together if they are similar in nature. Keep in mind that application of the guidance to the portfolio should not differ materially from application at the individual lease level.
Can a materiality threshold help determine which leases to recognize on the balance sheet?
Entities can create capitalization thresholds, and items beneath the limit would not need to be recognized on the balance sheet provided that the aggregate effect is not material. Capitalization thresholds for leases should generally mirror property, plant and equipment capitalization thresholds. Existing capitalization policies should also be revisited because right of use (ROU) assets could affect whether aggregated amounts should be capitalized.
Is a security deposit considered a lease payment?
If a nonrefundable security deposit is used to secure the lease, the deposit would be considered part of the paid contract consideration and therefore treated as a fixed lease payment. Refundable security deposits would not be considered lease payments.
How does a lessee account for other costs in the lease?
Components of the lease only include activities that transfer the good or service to the lessee. This includes maintenance services but not taxes or insurance. Consideration should be allocated to the lease and nonlease components based on relative standalone selling price.
How should variable lease payments based on an index or rate be calculated?
Variable lease payments based on specific indices or rates will include the index or rate in the initial lease liability calculation. If the variable lease payment is based on the change in the rate or index, the index or rate would not be included.
If a variable lease payment is based on performance or usage, does a lessee need to estimate the probable lease payment?
First, consider whether the payments are, in substance, fixed. If they are truly variable, then such payments are recognized in the period incurred. Variable lease payments based on usage or performance are likely either discrete performance targets or cumulative performance targets. Discrete targets will often be recorded in the period they are met, while the cumulative targets will need to factor in the probable payment amount over the duration of the contract and recognize a portion of that obligation each period.
How should a lessee present the ROU assets and lease liabilities for operating and finance leases in the balance sheet?
Operating and finance lease balance sheet items are presented separately from each other. ROU assets are amortizable and should not be separated between current and noncurrent portions. Lease liabilities representing future commitments and the portion of lease liabilities expected to be paid within the year should be presented as current liabilities.