ASC 842-20-50-4: Lease Cost Disclosure Requirements

The Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) 842, Leases, increases transparency by requiring organizations to recognize lease assets and liabilities on the balance sheet. This standard enhances disclosures in the notes to the financial statements, giving users a clearer view of cash flows from leases. This article focuses on the quantitative disclosure requirements for lease costs mandated by ASC 842-20-50-4, which requires lessees to disclose several components of their total lease cost for each period presented.

The Required Components of Lease Cost

ASC 842-20-50-4 mandates the separate disclosure of the elements that make up a company’s total lease cost. These disclosures provide a detailed breakdown of expenses from leasing activities and show how they impact the profit and loss statement.

Finance Lease Cost

For finance leases, the total cost recognized in the income statement has two parts. The first is the amortization of the right-of-use (ROU) asset, which is the systematic expensing of the asset’s value. The second is the interest on the lease liability, representing the financing component. The standard requires these two amounts to be disclosed separately.

Operating Lease Cost

Operating lease cost is the expense for leases not classified as finance leases. This cost is recognized as a single, straight-line lease expense over the lease term. The total payments are divided evenly across reporting periods, resulting in a consistent expense amount.

Short-Term Lease Cost

Companies can elect an accounting policy to not recognize ROU assets and lease liabilities for short-term leases. These are leases with a term of 12 months or less that do not contain a purchase option the lessee is reasonably certain to exercise. If this election is made, lease payments are expensed on a straight-line basis and disclosed separately.

Variable Lease Cost

Variable lease costs are payments that change due to factors other than the passage of time, such as a percentage of sales or an index rate. These costs are not included in the initial measurement of the lease liability and ROU asset. They are expensed as incurred and must be disclosed as a separate component of total lease cost.

Sublease Income

When a lessee rents out an asset it is currently leasing to a third party, it is called a sublease. The income from this sublease must be disclosed separately from lease costs. The standard specifies that sublease income should be presented on a gross basis and not netted against the company’s lease expenses.

Gathering Data for the Disclosure

Compiling the lease cost disclosure requires gathering data from a company’s accounting system by identifying and isolating the specific transactions and calculations for each cost component.

To determine finance lease cost, the ROU asset amortization is found in the company’s fixed asset subledger. The interest expense on the lease liability is derived from the lease liability amortization schedule, which details the allocation of each payment.

The total straight-line lease expense for operating leases is obtained by querying the general ledger for the specific expense accounts designated for these costs.

Short-term and variable lease costs are expensed as they are incurred. To gather this data, an analyst must identify the general ledger accounts where these expenses are recorded, which may involve reviewing accounts payable records and expense reports to isolate payments.

For sublease income, the process involves locating the revenue accounts where payments from sublessees are recorded. The total cash received or revenue accrued from these agreements during the period is the gross income figure required.

Presenting the Lease Cost Disclosure

The gathered data must be presented clearly in the notes to the financial statements, with a tabular format being the most common method. The disclosure note includes a table that itemizes each component of the total lease cost, listing each as a separate line item. This includes distinct lines for operating lease cost, short-term lease cost, and variable lease cost.

For finance leases, the presentation breaks down the cost into the amortization of the ROU asset and the interest on the lease liability. Sublease income is also presented as a separate line item, and the standard requires the gross income to be disclosed.

Below is a sample presentation of the lease cost disclosure table:

| Lease Cost | For the Year Ended December 31, 20XX |
| :— | :— |
| Finance lease cost: | |
| Amortization of right-of-use assets | $XXX,XXX |
| Interest on lease liabilities | $XXX,XXX |
| Total finance lease cost | $XXX,XXX |
| Operating lease cost | $XXX,XXX |
| Short-term lease cost | $XXX,XXX |
| Variable lease cost | $XXX,XXX |
| Total lease cost | $X,XXX,XXX |
| Sublease income | ($XXX,XXX) |
| Net lease cost | $X,XXX,XXX |