Key Takeaways
- ASC 842 has brought about significant changes to lease accounting disclosures, increasing both the scope and complexity of the disclosures required.
- There are several new quantitative disclosures required under the new standards for lessees: breaking out finance and operating leases, additional short-term lease considerations, maturity analysis, and cash flow information.
- It is critical to partner with a lease accounting software such as NetLease to help streamline this process and save you and your auditor time.
The introduction of ASC 842 brought significant changes in lease accounting practices, including an increased regulatory burden. One of the areas with added complexity is quantitative disclosures. Though the disclosures may seem overly burdensome, they are critically important to the transparent and accurate representation of a company’s leasing activities.
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Under ASC 840, lease disclosures only required a lease maturity schedule showing the next five years of payments. Now, under ASC 842, the scope of disclosures has drastically increased, and the complexity of disclosures (both quantitative and qualitative) has also grown.
Without a software solution like NetLease, compiling the data necessary to generate the required lease disclosures can be a long and painstaking process given the manual effort required and the necessity of validating the accuracy of the manual calculations. Compounding these challenges is the fact that lease agreements can and likely will change over time resulting in the need for modifications. These modifications will result in the need to recalculate the quantitative disclosure, repeating the long and painstaking manual process all over again. NetLease removes all this manual effort by taking the lease inputs entered into the system and automatically generating a full disclosure package with all the necessary data for your quantitative disclosures.
This article will explain the new disclosure requirements and where the related information can be found within our disclosure report example.
Quantitative Disclosures
Here’s a breakdown of some of the quantitative disclosures required under the new standards for lessees. To help you streamline your disclosure process, we have developed a NetLease report example for you to use. Download our disclosure report example to see the below in action.
1. Lease Costs – companies are required to disclose the lease cost recognized in each reporting period. The following are examples of the components of lease costs that must be disclosed:
- Operating Lease costs
- Finance Lease costs - Under ASC 842, finance lease costs must be separated from operating lease costs (ASC 842-20-50-4). Within this requirement, finance lease costs must be segregated, separating out the amortization of the right-of-use assets from the interest expense on the lease liabilities.
- Short Term Lease costs - additional disclosures are required for short-term leases (ASC 842-20-50-4). The lessee may recognize the lease payment on the P&L on a straight-line basis over the lease term (ASC 842-20-25-2).
- Variable Lease costs
Segregating Costs for Finance and Operating Leases
In some instances, costs for finance and operating leases must be segregated (ASC 842-20-50-4). Such costs include cash paid for amounts included in the measurement of lease liabilities, separated into operating and financing cash flows. It also includes supplemental non-cash information on lease liabilities arising from obtaining right-of-use assets.
The information needed for this disclosure can be found in the “Components of Lease Costs & Impairments Report” tab of our ASC 842 Disclosure Report Example.
2. Lease Income
This includes gross sublease income as well as the income from the sale of leased assets.
The information needed for this disclosure can be found in the “Sublease Schedule Data” tab of our ASC 842 Disclosure Report Example.
3. Maturity Analysis of Finance and Operating Lease Liabilities
Maturity analysis of finance lease liabilities and operating lease liabilities must now be done separately (ASC 842-20-50-60). Companies must show the undiscounted cash flows on an annual basis for a minimum of each of the first five years and a total of the amounts for the remaining years.
The information needed for this disclosure can be found in the “Undiscounted Lease Maturity Waterfall” tab of our ASC 842 Disclosure Report Example.
4. Cash-flow Information
Companies must show a reconciliation of undiscounted cash flows to finance lease liabilities and operating lease liabilities recognized in the statement of financial position (ASC 842-20-50-60).
The information needed for this disclosure can be found in the “Supplemental Cash Flow Info” tab of our ASC 842 Disclosure Report Example.
5. Weighted Average Remaining Lease Term and Weighted Average Discount Rate
When undertaking weighted average calculations, companies must disclose both the weighted average remaining lease term and the weighted average discount rate used to calculate the present value of the lease liabilities. These should be presented for both finance and operating leases individually.
The information needed for this disclosure can be found in the “Weighted Average Term” and “Weighted Average Rate” tabs of our ASC 842 Disclosure Report Example.
Bottom Line
ASC 842 has brought about significant changes to lease accounting disclosures, increasing both the scope and complexity of the disclosures required. Companies must now provide much more detailed information about their leases, including separating lease costs for finance and operating leases. It is more important than ever to partner with a lease accounting software provider such as NetLease to help streamline this process and save you and your auditors time this busy season.
Download our disclosure report example.
For more information on qualitative disclosures, read our article What New Disclosures are Required Under ASC 842, IFRS 16 & GASB 87?
