ASU 2019-01: Key Amendments for Lease Accounting

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2019-01 as a set of targeted improvements to the lease accounting standard, ASC 842. This update does not overhaul the leasing rules but instead addresses specific issues that emerged during the initial implementation of ASC 842. Responding to feedback from companies that found certain aspects of the standard to be challenging or costly, the FASB provided clarifications to reduce unnecessary complexity and cost.

Key Amendments for Lessors

An amendment in ASU 2019-01 addresses how certain lessors determine the fair value of an asset they are leasing out. Under the initial release of ASC 842, lessors who were not manufacturers or dealers had to determine fair value according to the definition in ASC 820. This created a problem because costs to acquire the asset, such as sales taxes or delivery fees, could not be included in its fair value, potentially forcing the lessor to recognize a financial loss on the first day of the lease. To resolve this, ASU 2019-01 provides an expedient allowing these lessors to measure the fair value of the underlying asset at its cost, which includes those initial acquisition charges. This change prevents the artificial day-one loss unless a significant amount of time has passed between acquiring the asset and the lease commencement.

Another change for lessors involves the accounting for costs paid by the lessee directly to third parties, such as property taxes and insurance on the leased asset. The original guidance in ASC 842 required lessors to estimate these payments and include them in variable lease revenue, while also recording an equal expense. This “gross-up” approach increased both revenue and expenses on the income statement without affecting net income. The amendment simplifies this by allowing lessors to exclude these direct third-party payments from the calculation of variable lease payments, which reduces administrative burden and provides a clearer picture of the lessor’s revenue.

Clarifications on Transition Disclosures

ASU 2019-01 provides relief for disclosure requirements during the year an entity adopts ASC 842. The original standard required entities to provide a full set of transition disclosures, governed by ASC 250, in every interim financial statement, such as quarterly reports, filed in the year of adoption. This requirement proved to be burdensome, as it meant companies had to repeat extensive disclosures in each quarterly report throughout the first year. The amendment clarifies that these detailed transition disclosures are not required in the interim reports issued during the fiscal year of adoption. Instead, the entity must provide the disclosures in the annual report and any interim reports filed after the initial adoption date.

Adoption and Effective Dates

The effective dates for ASU 2019-01 were structured to align with the implementation of ASC 842. For public business entities, the amendments were effective for fiscal years beginning after December 15, 2019. For all other entities, the effective date was for fiscal years beginning after December 15, 2019, and for interim periods in fiscal years starting after December 15, 2020. The FASB permitted early adoption of the amendments for all entities, providing flexibility for companies that were prepared to implement the changes ahead of the mandatory deadlines. Entities are required to adopt these amendments at the same time they adopt the main lease standard, applying them retrospectively to the beginning of the period in which ASC 842 was adopted.