/
Help (FASB ASC 842)

Help (FASB ASC 842)

Table of Contents

Add Lease Screen

Local Currency:

Summary Guidance: Local Currency is the currency used to pay your lease obligations (typically the currency used in the entity's particular geographical location). Local Currency is used in the following tabs:

  • Administration/Reporting Entity: Select the Local Currency for each Reporting Entity.

  • Add Lease: The Local Currency default from Administration/Reporting Entity will prefill after the Reporting Entity is selected. The user is able to select a different local currency.  

  • My Leases: Local Currency reports can be exported by selecting the Local Currency tab.

Historical Exchange (fx) rate:   

Summary Guidance: The Historical fx Rate is the exchange rate from the Local Currency to the Functional Currency at the Start Date of the lease. It is used to translate (throughout the term of the lease) the Lessee’s ROU Asset and Amortization Expense or the Lessor’s Deferred Rent and Revenue from the Local Currency to the Functional Currency.

Technical Guidance:

(FASB: 842-20-55-10): The right-of-use asset is a nonmonetary asset while the lease liability is a monetary liability. Therefore, in accordance with Subtopic 830-10 on foreign currency matters, when accounting for a lease that is denominated in a foreign currency, if remeasurement into the lessee’s functional currency is required, the lease liability is remeasured using the current exchange rate, while the right-of-use asset is remeasured using the exchange rate as of the commencement date.

Start Date:

Summary Guidance: The Start Date is either:

  • Initial Application Date for leases that have a Commencement Date prior to the Initial Application Date.

  • Commencement Date for leases that begin after the Initial Application Date.

Commencement Date is defined as the date on which the Lessor makes an underlying asset available for use by a Lessee.

Technical Guidance:

(FASB: 842-10-65-1(c)): c. In the financial statements in which an entity first applies the pending content that links to this paragraph, the entity shall recognize and measure leases within the scope of the pending content that links to this paragraph that exist at the application date, as determined by the transition method that the entity elects. See definition of Initial Application Date.

End Date:

Summary Guidance: The End Date is typically the last day of the lease. However, you must consider early termination options and renewal options.

  • If you determine that you will exercise an early termination option because you are reasonably certain to end the lease prior to its stated end date, then use the date of the early termination option as the End Date.

    • A lease is no longer enforceable when both the Lessee and Lessor have the right to terminate without permission from the other party with no more than an insignificant penalty.

  • If you determine that you will exercise one or more renewal options, because you are reasonably certain to continue the lease, use the last day of the renewal option as the End Date.

Technical Guidance:

(FASB: 842-10-30-1-4): 1 An entity shall determine the lease term as the noncancellable period of the lease, together with all of the following: a. Periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option b. Periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option (i.e., bypassing an early termination option) c. Periods covered by an option to extend (or not to terminate) the lease in which exercise of the option is controlled by the lessor. 2 At the commencement date, an entity shall include the periods described in paragraph 842-10-30-1 in the lease term having considered all relevant factors that create an economic incentive for the lessee (that is, contract-based, asset-based, entity-based, and market-based factors). Those factors shall be considered together, and the existence of any one factor does not necessarily signify that a lessee is reasonably certain to exercise or not to exercise an option. 3 At the commencement date, an entity shall assess an option to purchase the underlying asset on the same basis as an option to extend or not to terminate a lease, as described in paragraph 842-10-30-2. 4 See paragraphs 842-10-55-19 through 55-21 for implementation guidance on commencement date and paragraphs 842-10-55-23 through 55-27 for implementation guidance on lease term and purchase options. See Examples 23 through 24 (paragraphs 842-10-55-210 through 55-224) for illustrations of the requirements on purchase options. (FASB: 842-10-55-23): An entity should determine the noncancellable period of a lease when determining the lease term. When assessing the length of the noncancellable period of a lease, an entity should apply the definition of a contract and determine the period for which the contract is enforceable. A lease is no longer enforceable when both the lessee and the lessor each have the right to terminate the lease without permission from the other party with no more than an insignificant penalty.

Lease Term:

Summary Guidance: The number of months from the Start Date to the End Date.

  • The Start Date is not the date you sign the lease but instead is the Commencement Date of the lease, which is defined as the date on which the Lessor makes an underlying asset available for use by a Lessee.

  • The End Date is typically the last day of the lease. However, you must consider early termination options and renewal options.

    • If you determine that you will exercise an early termination option because it is reasonably certain the lease will end prior to its stated end date, then use the date of the early termination option as the End Date.

      • A lease is no longer enforceable when both the Lessee and Lessor have the right to terminate without permission from the other party with no more than an insignificant penalty.

  • If you determine that you will exercise one or more renewal options, because you are reasonably certain to continue the lease, use the last day of the renewal option as the End Date.

Technical Guidance:

(FASB: 842-10-30-1-4): 1 An entity shall determine the lease term as the noncancellable period of the lease, together with all of the following: a. Periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option b. Periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option (i.e., bypassing an early termination option) c. Periods covered by an option to extend (or not to terminate) the lease in which exercise of the option is controlled by the lessor. 2 At the commencement date, an entity shall include the periods described in paragraph 842-10-30-1 in the lease term having considered all relevant factors that create an economic incentive for the lessee (that is, contract-based, asset-based, entity-based, and market-based factors). Those factors shall be considered together, and the existence of any one factor does not necessarily signify that a lessee is reasonably certain to exercise or not to exercise an option. 3 At the commencement date, an entity shall assess an option to purchase the underlying asset on the same basis as an option to extend or not to terminate a lease, as described in paragraph 842-10-30-2. 4 See paragraphs 842-10-55-19 through 55-21 for implementation guidance on commencement date and paragraphs 842-10-55-23 through 55-27 for implementation guidance on lease term and purchase options. See Examples 23 through 24 (paragraphs 842-10-55-210 through 55-224) for illustrations of the requirements on purchase options. (FASB: 842-10-55-23): An entity should determine the noncancellable period of a lease when determining the lease term. When assessing the length of the noncancellable period of a lease, an entity should apply the definition of a contract and determine the period for which the contract is enforceable. A lease is no longer enforceable when both the lessee and the lessor each have the right to terminate the lease without permission from the other party with no more than an insignificant penalty.

Lease Term Guidance Wizard: This wizard is meant to help you in 2 ways:

  1. Guide you to correctly identify the Lease Term as there involves judgment with regards to early termination options and renewal options.

  2. Create an audit trail of your answers for review by you, management or your auditors.

ROU Asset Life:

Summary Guidance: The Right-of-Use (ROU) Asset Life (applicable to Lessees only) is almost always the same as the lease term. However, when the Lessee is Reasonably Certain to exercise an option to purchase the underlying asset, the ROU Asset Life is the useful life of the asset (i.e., how long the asset will be available for your use), which can be longer than the Lease Term. The ROU Asset is amortized over the ROU Asset Life.

The software uses a full month convention, amortizing evenly over the number of months in the ROU Asset Life. If the End Date is in the middle of the month, the ROU Asset Life defaults to Term minus one month to stop the depreciation in the second to last month. You can update ROU Asset Life as needed for different expense recognition. See the example below.

Start Date: 1/5/2026 End Date: 1/4/2027 Term: 13 Months ROU Asset Life: 12 Months (Defaults to Term -1) Amortization Expense over Term: $12,000 Year-Month Amortization Expense when ROU Asset Life = 12 (Default) Amortization Expense when ROU Asset Life = 13 2026-01 $1,000.00  $923.08 2026-02 $1,000.00  $923.08 2026-03 $1,000.00  $923.08 2026-04 $1,000.00  $923.08 2026-05 $1,000.00  $923.08 2026-06 $1,000.00  $923.08 2026-07 $1,000.00  $923.08 2026-08 $1,000.00  $923.08 2026-09 $1,000.00  $923.08 2026-10 $1,000.00  $923.08 2026-11 $1,000.00  $923.08 2026-12 $1,000.00  $923.08 2027-01 $0.00  $923.04 Total $12,000.00 $12,000.00

Technical Guidance:

(FASB: 842-20-35-8): A lessee shall amortize the right-of-use (ROU) asset from the commencement date to the earlier of: The end of the useful life of the right-of-use asset or The end of the lease term. However, if the lease transfers ownership of the underlying asset to the lessee or the lessee is reasonably certain to exercise an option to purchase the underlying asset, the lessee shall amortize the right-of use asset to the end of the useful life of the underlying asset. (FASB 842: Glossary, Page 101): Useful life: the period over which an asset is expected to contribute directly or indirectly to future cash flows.

Discount Rate:

Summary Guidance: The Discount Rate should be the annual rate implicit in the lease. If the implicit rate or the inputs to calculate the implicit rate are not readily determinable, which is often the case, the discount rate is one of the following options:

  • The Lessee's incremental borrowing rate (i.e., what the Lessee can borrow over a similar term to obtain an asset of similar value in a similar economic environment).

  • Alternatively, non-public companies could have made a policy election by asset class at the time of implementation to use a risk-free rate of return (see Administration/Policies). The risk-free rate for various time periods that approximate the Lease Term can be found at: US Treasury Rates.

The implicit rate is the rate derived when:

  • PV of Lease Payments + PV of Lessor’s Residual Value = Fair Value of Asset (less investment tax credits) + Lessor’s Initial Direct Costs (Download FASB Calculator)

    • Note: The sum of Total Payments must be greater than the Fair Value of the underlying asset in order to arrive at an implicit rate.

Technical Guidance:

(FASB: 842-20-30-2-3):  2 The discount rate for the lease initially used to determine the present value of the Lease Payments for a lessee is calculated on the basis of information available at the commencement date. 3 A lessee should use the rate implicit in the lease whenever that rate is readily determinable. If the rate implicit in the lease is not readily determinable, a lessee uses its incremental borrowing rate. A lessee that is not a public business entity is permitted to use a risk-free discount rate for the lease instead of its incremental borrowing rate, determined using a period comparable with that of the lease term, as an accounting policy election made by class of underlying asset. (FASB: 842-20-35-5): If there is a remeasurement of the lease liability in accordance with paragraph 842-20-35-4, the lessee shall update the discount rate for the lease at the date of remeasurement on the basis of the remaining lease term and the remaining lease payments unless the remeasurement of the lease liability is the result of one of the following: a. A change in the lease term or the assessment of whether the lessee will exercise an option to purchase the underlying asset and the discount rate for the lease already reflects that the lessee has an option to extend or terminate the lease or to purchase the underlying asset. b. A change in amounts probable of being owed by the lessee under a residual value guarantee (see paragraph 842-10-35-4(c)(3)). c. A change in the lease payments resulting from the resolution of a contingency upon which some or all of the variable lease payments that will be paid over the remainder of the lease term are based (see paragraph 842-10-35-4(b)). (FASB 842: Glossary) Fair Value: The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Incremental borrowing rate: The rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the Lease Payments in a similar economic environment. Rate Implicit in the Lease:  The rate of interest that, at a given date, causes the aggregate present value of (a) the lease payments and (b) the amount that a lessor expects to derive from the underlying asset following the end of the lease term to equal the sum of (1) the fair value of the underlying asset minus any related investment tax credit retained and expected to be realized by the lessor and (2) any deferred initial direct costs of the lessor.

Incentives Received (Lessee):

Summary Guidance: Incentives Received by a Lessee are:

  1. Payments (at or before the Start Date) made by the Lessor to the Lessee (e.g., Lessor pays cash to Lessee for a furniture purchase).

  2. The reimbursement or assumption by a Lessor of costs of a Lessee (e.g., Lessor pays off Lessee's remaining payments from a previous office lease in order to have them relocate early).

Any payments made by the Lessor to the Lessee after the Start Date should not be included in this field. Instead, these payments should be entered as a negative payment stream in the Lease Payments & Classification section of the software.

Technical Guidance:

(842-10-55-30): Lease incentives include both of the following: a. Payments made to or on behalf of the lessee b. Losses incurred by the lessor as a result of assuming a lessee’s preexisting lease with a third party. In that circumstance, the lessor and the lessee should independently estimate any loss attributable to that assumption. For example, the lessee’s estimate of the lease incentive could be based on a comparison of the new lease with the market rental rate available for similar underlying assets or the market rental rate from the same lessor without the lease assumption. The lessor should estimate any loss on the basis of the total remaining costs reduced by the expected benefits from the sublease of use of the assumed underlying asset. (FASB: 842-20-30-5): At the commencement date, the cost of the right-of-use asset shall consist of all of the following: a. The amount of the initial measurement of the lease liability b. Any Lease Payments made to the lessor at or before the commencement date, minus any Lease Incentives Received c. Any Initial Direct Costs incurred by the lessee

Incentives Paid (Lessor):

Summary Guidance: Incentives Paid by a Lessor are:

  1. Payments (at or before the Start Date) made by the Lessor to the Lessee (e.g., Lessor pays cash to Lessee for a furniture purchase).

  2. The reimbursement or assumption by a Lessor of costs of a Lessee (e.g., Lessor pays off Lessee's remaining payments from a previous office lease in order to have them relocate early).

Any payments made by the Lessor to the Lessee after the Start Date should not be included in this field. Instead, these payments should be entered as a negative receipt stream in the Lease Receipts & Classification section of the software.

Technical Guidance:

(FASB: 842-10-55-30): Lease incentives include both of the following: a. Payments made to or on behalf of the lessee b. Losses incurred by the lessor as a result of assuming a lessee’s preexisting lease with a third party. In that circumstance, the lessor and the lessee should independently estimate any loss attributable to that assumption. For example, the lessee’s estimate of the lease incentive could be based on a comparison of the new lease with the market rental rate available for similar underlying assets or the market rental rate from the same lessor without the lease assumption. The lessor should estimate any loss on the basis of the total remaining costs reduced by the expected benefits from the sublease of use of the assumed underlying asset.

Initial Direct Costs:

Summary Guidance: Initial Direct Costs are costs that would not occur if the lease were not signed (e.g., commissions to a broker or payments made to an existing tenant to incentivize that tenant to terminate its lease). Initial Direct Costs do not include legal fees or tax advisory fees as those fees are not dependent on signing the lease.

Technical Guidance:

(FASB: 842, Glossary): Initial direct costs: Incremental costs of a lease that would not have been incurred if the lease had not been obtained. (FASB: 842-10-30-9-10): 9 Initial Direct Costs for a lessee or a lessor may include, for example, either of the following: a. Commissions b. Payments made to an existing tenant to incentivize that tenant to terminate its lease 10 Costs to negotiate or arrange a lease that would have been incurred regardless of whether the lease was obtained, such as fixed employee salaries, are not initial direct costs. The following items are examples of costs that are not initial direct costs: a. General overheads, including, for example, depreciation, occupancy and equipment costs, unsuccessful origination efforts, and idle time b. Costs related to activities performed by the lessor for advertising, soliciting potential lessees, servicing existing leases, or other ancillary activities c. Costs related to activities that occur before the lease is obtained, such as costs of obtaining tax or legal advice, negotiating lease terms and conditions, or evaluating a prospective lessee’s financial condition. (FASB: 842-20-30-5): The Initial Direct Costs increases the calculation of the right-of-use asset. At the Start Date, the cost of the right-of-use asset shall consist of all of the following: a. The amount of the initial measurement of the lease liability b. Any Lease Payments made to the lessor at or before the commencement date, minus any lease Incentives Received c. Any Initial Direct Costs incurred by the lessee

Add Lease Payment Stream (Lessee):

Summary Guidance: For a comprehensive list of payments that are considered Lease Payments, see our Technical Guidance section below. In summary, Lease Payments for Lessees include:

  • Fixed payments (including lease incentives paid after the Start Date, which reduce Lease Payments). If the incentives are received at or prior to the Start Date, include them in the Incentives Received field in the software.

  • Variable Lease Payments (see details and examples below) that depend on an index or rate that are measured on the Start Date

  • Residual Value Guarantees (only include amounts probable to be paid)

  • Purchase cost at the End Date of a lease

  • Termination penalties, if known at Start Date

  • Fixed payments for activities or costs that are not components of a contract (e.g., real estate taxes or insurance in an office lease) 

  • Fixed Non-Lease component costs (e.g., fixed service charge related to maintenance of an office lease)

    • If policy election to combine lease and Non-Lease components was elected, include in Lease Payments

    • If policy election to combine lease and Non-Lease components was not elected, include in Non-Lease Payments

Below you will find definitions and examples of Lease Payments vs Variable Lease Expense. If payments do not meet the definition of Lease Payments, enter in the Variable & Other Payments tab.

Types of Payments

Lease Payment (used to measure Lease Liability)

Variable Lease Expense (period expense)

Payments dependent on an index or a rate initially measured at the Start Date. See Example 1 below.

X

 

Payments dependent on an index or a rate that change after the Start Date. See Example 1 below.

 

X

Payments that vary because of changes in circumstances, not related to an index or rate (e.g., % of sales). See Examples 2 & 3 below.

 

X

Examples of Payments Lease Payment Variable Lease Expense Example 1: Three-year office lease with $100/year to increase by a cost of living index each year. Actual payments are $100 in Year 1, $102 in Year 2, $103 in Year 3. Yr1: $100 Yr2: $100 Yr3: $100 Yr1: $0 Yr2: $2 Yr3: $3 Example 2: Three-year office lease with $100/year and annual real estate taxes bill at $20/year but trued up at the end of the each Year. The tax true ups are as follows: Year 1- $10, Year 2- $30, Year 3 - $50 Yr1: $120 Yr2: $120 Yr3: $120 Yr1: $10 Yr2: $30 Yr3: $50 Example 3: Three-year lease with payments based on 2% of sales. Sales were $10,000, $11,000, and $12,000 in Years 1-3 Yr1: $200 Yr2: $220 Yr3: $240

Technical Guidance:

(FASB: 842-10-15-37): As a practical expedient, a lessee may, as an accounting policy election by class of underlying asset, choose not to separate nonlease components from lease components and instead to account for each separate lease component and the nonlease components associated with that lease component as a single lease component (FASB: 842-10-30-5): At the commencement date, the lease payments shall consist of the following payments relating to the use of the underlying asset during the Lease Term: a. Fixed payments, including in substance fixed payments less any lease incentives paid or payable to the lessee. b. Variable lease payments that depend on an index or a rate (such as the Consumer Price Index or a market interest rate), initially measured using the index or rate at the commencement date. c. The exercise price of an option to purchase the underlying asset if the lessee is reasonably certain to exercise that option (assessed considering the factors in paragraph FASB: 842-10-55-26). d. Payments for penalties for terminating the lease if the lease term (as determined in accordance with paragraph 842-10-30-1) reflects the lessee exercising an option to terminate the lease. e. Fees paid by the lessee to the owners of a special-purpose entity for structuring the transaction. However, such fees shall not be included in the fair value of the underlying asset for purposes of applying paragraph 842-10-25-2(d). f. For a lessee only, amounts probable of being owed by the lessee under residual value guarantees (see FASB: 842-10-55-34 through 36). (FASB: 842-10-30-6): Lease Payments do not include any of the following: a. Variable Lease Payments not based on an index or a rate. Examples include payments based on a % of sales or based on the number of hours an asset is used. See examples at FASB: 842-10-55-150 through 154 and 842-10-55-232 through 234. b. Any guarantee by the lessee of the lessor’s debt c. Amounts allocated to nonlease components in accordance with 842-10-15-33 through 42, if lessee does not elect a policy to combine lease and nonlease components per FASB: 842-10-15-37. d. Payments for activities or costs that are not components of a contract (e.g., taxes or insurance in an office lease) if those amounts are variable per FASB 842-10-55-141 through 142. (FASB: 842-10-55-31): Lease payments include in substance fixed lease payments. In substance fixed payments are payments that may, in form, appear to contain variability but are, in effect, unavoidable. In substance fixed payments for a lessee or a lessor may include, for example, any of the following: a. Payments that do not create genuine variability (such as those that result from clauses that do not have economic substance) b. The lower of the payments to be made when a lessee has a choice about which set of payments it makes, although it must make at least one set of payments. (FASB: 842-10-55-37): Obligations imposed by a lease agreement to return an underlying asset to its original condition if it has been modified by the lessee (for example, a requirement to remove a lessee-installed leasehold improvement) generally would not meet the definition of lease payments or variable lease payments and would be accounted for in accordance with Subtopic 410-20 on asset retirement and environmental obligations. In contrast, costs to dismantle and remove an underlying asset at the end of the lease term that are imposed by the lease agreement generally would be considered lease payments or variable lease payments.

Add Lease Receipt Stream (Lessor):

Summary Guidance: For a comprehensive list of receipts that are considered Lease Receipts, see the Technical Guidance section below. In summary, Lease Receipts for Lessors include:

  • Fixed receipts (including lease incentives paid after the Start Date, which reduce Lease Revenue). If the incentives are paid at or prior to the Start Date, include them in the Incentives Paid field in the software.

  • Variable Lease Receipts (see details and examples below) that depend on an index or rate that are measured on the Start Date

  • Exercise price of a purchase option if the Lessee is reasonably certain to exercise that option

  • Penalties for terminating the lease, if the lease term reflects the Lessee exercising an option to terminate the lease

  • Residual Value Guarantees:

    • Exclude from Lease Receipts the Residual Value Guarantees from Lessee or third parties. At the end of the term, record any amounts received as a Variable Lease Receipt (in the Variable and Non-Lease Receipts tab).

  • Fixed receipts for activities or costs that are not components of a contract (e.g., real estate taxes or insurance in an office lease).

Below you will find definitions and examples of Lease Receipts vs Variable Lease Receipts. If receipts do not meet the definition of Lease Receipts, enter in the Variable & Other Receipts tab.

Types of Receipts

Lease Receipts

Variable Lease Revenue(period receipts)

Receipts dependent on an index or a rate initially measured at the Start Date. See Example 1 below.

X

 

Receipts dependent on an index or a rate that change after the Start Date. See Example 1 below.

 

X

Payments that vary because of changes in circumstances, not related to an index or rate (e.g., % of sales). See Examples 2 & 3 below.

 

X

 

Residual Value Guarantee

 

X

At the end of the term, record as a Variable Lease Receipt (in the Variable and Non-Lease Receipts tab).

 

Examples of Receipts Lease Receipt Variable Lease Revenue Example 1: Three-year office lease with $100/year to increase by a cost of living index each year. Actual receipts are $100 in year 1, $102 in Year 2, $103 in Year 3. Yr1: $100 Yr2: $100 Yr3: $100 Yr1: $0 Yr2: $2 Yr3: $1 Example 2: Three-year office lease with $100/year and annual real estate taxes bill at $20/year but trued up at the end of the each Year. The tax true ups are as follows: Year 1- $10, Year 2- $30, Year 3 - $50 Yr1: $120 Yr2: $120 Yr3: $120 Yr1: $10 Yr2: $30 Yr3: $50 Example 3: Three-year lease with receipts based on 2% of sales. Sales were $10,000, $11,000 and $12,000 in Years 1-3 Yr1: $200 Yr2: $220 Yr3: $240 Example 4: Three-year office lease with $100/year paid in arears. Residual Value Guarantee by Lessee of $150 were expected at end of lease term. Furthermore, actual amount paid as a Residual Value Guarantee was $180. Initial: Yr1: $100 Yr2: $100 Yr3: $100 Yr3:$180

Technical Guidance:

(FASB: Glossary): Lease Payments: See paragraph 842-10-30-5 for what constitutes lease payments from the perspective of a lessee and a lessor, (FASB: 842-10-15-39A to 40A): 39A A lessor may make an accounting policy election to exclude from the consideration in the contract and from variable payments not included in the consideration in the contract all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific lease revenue-producing transaction and collected by the lessor from a lessee (for example, sales, use, value added, and some excise taxes). Taxes assessed on a lessor’s total gross receipts or on the lessor as owner of the underlying asset shall be excluded from the scope of this election. A lessor that makes this election shall exclude from the consideration in the contract and from variable payments not included in the consideration in the contract all taxes within the scope of the election and shall comply with the disclosure requirements in paragraph 842-30-50-14. 40A The guidance in paragraph 842-10-15-40 notwithstanding, a lessor shall exclude from variable payments lessor costs paid by a lessee directly to a third party. However, costs excluded from the consideration in the contract that are paid by a lessor directly to a third party and are reimbursed by a lessee are considered lessor costs that shall be accounted for by the lessor as variable payments (this requirement does not preclude a lessor from making the accounting policy election in paragraph 842-10-15-39A). (FASB: 842-10-15-42A to 42C): 42A As a practical expedient, a lessor may, as an accounting policy election, by class of underlying asset, choose to not separate nonlease components from lease components and, instead, to account for each separate lease component and the nonlease components associated with that lease component as a single component if the nonlease components otherwise would be accounted for under Topic 606 on revenue from contracts with customers and both of the following are met: a. The timing and pattern of transfer for the lease component and nonlease components associated with that lease component are the same. b. The lease component, if accounted for separately, would be classified as an operating lease in accordance with paragraphs 842-10-25-2 through 25-3 42B A lessor that elects the practical expedient in paragraph 842-10- 15-42A shall account for the combined component: a. As a single performance obligation entirely in accordance with Topic 606 if the nonlease component or components are the predominant component(s) of the combined component. In applying Topic 606, the entity shall do both of the following: Use the same measure of progress as used for applying paragraph 842-10-15-42A(a) Account for all variable payments related to any good or service, including the lease, that is part of the combined component in accordance with the guidance on variable consideration in Topic 606. b. Otherwise, as an operating lease entirely in accordance with this Topic. In applying this Topic, the entity shall account for all variable payments related to any good or service that is part of the combined component as variable lease payments. In determining whether a nonlease component or components are the predominant component(s) of a combined component, a lessor shall consider whether the lessee would be reasonably expected to ascribe more value to the nonlease component(s) than to the lease component. 42C A lessor that elects the practical expedient in paragraph 842-10- 15-42A shall combine all nonlease components that qualify for the practical expedient with the associated lease component and shall account for the combined component in accordance with paragraph 842-10-15-42B. A lessor shall separately account for nonlease components that do not qualify for the practical expedient. Accordingly, a lessor shall apply paragraphs 842-10-15-38 through 15- 42 to account for nonlease components that do not qualify for the practical expedient. (FASB: 842-10-30-5 to 6): 5 At the commencement date, the lease payments shall consist of the following payments relating to the use of the underlying asset during the Lease Term: a. Fixed payments, including in substance fixed payments less any lease incentives paid or payable to the lessee. Fixed payments includes activities or costs that are not components of a contract, such as reimbursement of lessor’s costs (e.g., real estate taxes or insurance in an office lease) per FASB 842-10-55-142 to 143. b. Variable lease payments that depend on an index or a rate (such as the Consumer Price Index or a market interest rate), initially measured using the index or rate at the commencement date. c. The exercise price of an option to purchase the underlying asset if the lessee is reasonably certain to exercise that option (assessed considering the factors in paragraph FASB: 842-10-55-26). d. Payments for penalties for terminating the lease if the lease term (as determined in accordance with paragraph 842-10-30-1) reflects the lessee exercising an option to terminate the lease. e. Fees paid by the lessee to the owners of a special-purpose entity for structuring the transaction. However, such fees shall not be included in the fair value of the underlying asset for purposes of applying paragraph 842-10-25-2(d). f. For a lessee only, amounts probable of being owed by the lessee under residual value guarantees (see FASB: 842-10-55-34 through 36). 6 Lease Payments do not include any of the following: a. Variable Lease Payments not based on an index or a rate. Examples include payments based on a % of sales or based on the number of hours an asset is used. See examples at FASB: 842-10-55-150 through 154 and 842-10-55-232 through 234. b. Any guarantee by the lessee of the lessor’s debt c. Amounts allocated to nonlease components in accordance with 842-10-15-33 through 42 (FASB: 842-10-55-31): Lease payments include in substance fixed lease payments. In substance fixed payments are payments that may, in form, appear to contain variability but are, in effect, unavoidable. In substance fixed payments for a lessee or a lessor may include, for example, any of the following: a. Payments that do not create genuine variability (such as those that result from clauses that do not have economic substance) b. The lower of the payments to be made when a lessee has a choice about which set of payments it makes, although it must make at least one set of payments. (FASB: 842-10-55-37): Obligations imposed by a lease agreement to return an underlying asset to its original condition if it has been modified by the lessee (for example, a requirement to remove a lessee-installed leasehold improvement) generally would not meet the definition of lease payments or variable lease payments and would be accounted for in accordance with Subtopic 410-20 on asset retirement and environmental obligations. In contrast, costs to dismantle and remove an underlying asset at the end of the lease term that are imposed by the lease agreement generally would be considered lease payments or variable lease payments.

Residual Value Guarantee:

Summary Guidance: Guarantee made by the Lessee, or a third-party, to the Lessor, that ensures that the value of the underlying asset returned to the Lessor at the end of the lease will be a specified amount.

Lessee: Only amounts probable to be payable at the end of the lease term are added to the Lease Payments. If there is a change in the amount probable, create a Revision (select “Residual Value Guarantee (RVG)”) to enter updated payment information.

Lessor: Exclude from lease receipts the Residual Value Guarantees from the Lessee or third parties. At the end of the term, record any amounts received as a variable lease receipt in the Variable & Non-Lease Receipts tab.

Residual Value Guarantees, together with the rest of the Lease Payments, are utilized in the determination of Lease classification.

Technical Guidance:

(FASB: Glossary): Residual Value Guarantee: A guarantee made to a lessor that the value of an underlying asset returned to the lessor at the end of a lease will be at least a specified amount. (FASB: 842-10-30-5): At the commencement date, the lease payments shall consist of the following payments relating to the use of the underlying asset during the Lease Term: a. Fixed payments, including in substance fixed payments less any lease incentives paid or payable to the lessee. b. Variable lease payments that depend on an index or a rate (such as the Consumer Price Index or a market interest rate), initially measured using the index or rate at the commencement date. c. The exercise price of an option to purchase the underlying asset if the lessee is reasonably certain to exercise that option (assessed considering the factors in paragraph FASB: 842-10-55-26). d. Payments for penalties for terminating the lease if the lease term (as determined in accordance with paragraph 842-10-30-1) reflects the lessee exercising an option to terminate the lease. e. Fees paid by the lessee to the owners of a special-purpose entity for structuring the transaction. However, such fees shall not be included in the fair value of the underlying asset for purposes of applying paragraph 842-10-25-2(d). f. For a lessee only, amounts probable of being owed by the lessee under residual value guarantees (see FASB: 842-10-55-34 through 36). (FASB: 842-10-25-2) A lessee shall classify a lease as a finance lease and a lessor shall classify a lease as a sales-type lease when the lease meets any of the following criteria at lease commencement: a. The lease transfers ownership of the underlying asset to the lessee by the end of the lease term. b. The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise. c. The lease term is for the major part of the remaining economic life of the underlying asset. However, if the commencement date falls at or near the end of the economic life of the underlying asset, this criterion shall not be used for purposes of classifying the lease. d. The present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments in accordance with paragraph 842-10-30-5(f) equals or exceeds substantially all of the fair value of the underlying asset. e. The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. (FASB: 842-10-25-3) When none of the criteria in paragraph 842-10-25-2 are met: a. A lessee shall classify the lease as an operating lease. b. A lessor shall classify the lease as either a direct financing lease or an operating lease. A lessor shall classify the lease as an operating lease unless both of the following criteria are met, in which case the lessor shall classify the lease as a direct financing lease: The present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments in accordance with paragraph 842-10-30-5(f) and/or any other third party unrelated to the lessor equals or exceeds substantially all of the fair value of the underlying asset. It is probable that the lessor will collect the lease payments plus any amount necessary to satisfy a residual value guarantee. (FASB: 842-10-55-9): Lessors may obtain residual value guarantees for a portfolio of underlying assets for which settlement is not solely based on the residual value of the individual underlying assets. In such cases, the lessor is economically assured of receiving a minimum residual value for a portfolio of assets that are subject to separate leases but not for each individual asset. Accordingly, when an asset has a residual value in excess of the “guaranteed” amount, that excess is offset against shortfalls in residual value that exist in other assets in the portfolio. (FASB: 842-10-55-10): Residual value guarantees of a portfolio of underlying assets preclude a lessor from determining the amount of the guaranteed residual value of any individual underlying asset within the portfolio. Consequently, no such amounts should be considered when evaluating the lease classification criteria in paragraphs 842-10-25-2(d) and 842-10-25-3(b)(1).

Classification:

Summary Guidance: There are several Lease Classification depending on whether the party is a Lessee or a Lessor under FASB.

 

Lease Classification

 

Lease Classification

Lessee

Operating Leases

Finance Leases

Lessor

Operating Leases

Sales-Type Leases

Direct Financing Leases

A lease that meets at least one of the criteria below will be classified as a Finance Lease (if a Lessee) or Sales-Type Lease (if a Lessor).

Classification Criteria:
a. Transfers ownership to Lessee
b. Option to purchase that Lessee is reasonably certain to exercise
c. Lease Term is a major part (e.g., 75%) of its economic life (life of the asset by all users, not just the Lessee)
d. Present value of Lease Payments and residual value guarantee by Lessee that is substantially all (e.g., 90%) of the fair market value
e. Leased asset has no future use by Lessor

Additional Classification Criteria for Lessors:

  • Direct-Financing Lease if both of the following are met:

    • Present value of lease payments and residual value guarantee by Lessee and/or third party that is substantially all (e.g., 90%) of the fair market value.

    • It is probable that the Lessor will collect the lease payments, plus any amount necessary to satisfy a residual value guarantee.

  • A Lessor shall classify a lease with variable lease payments that do not depend on an index or a rate as an operating lease at lease commencement if classifying the lease as a sales-type lease or a direct financing lease would result in the recognition of a selling loss.

Technical Guidance:

(FASB: 842-10-25-1): An entity shall classify each separate lease component at the commencement date. An entity shall not reassess the lease classification after the commencement date unless the contract is modified and the modification is not accounted for as a separate contract in accordance with paragraph 842-10-25-8. In addition, a lessee also shall reassess the lease classification after the commencement date if there is a change in the lease term or the assessment of whether the lessee is reasonably certain to exercise an option to purchase the underlying asset. (FASB: 842-10-25-2):  A lessee shall classify a lease as a finance lease and a lessor shall classify a lease as a sales-type lease when the lease meets any of the following criteria at lease commencement: a. The lease transfers ownership of the underlying asset to the lessee by the end of the lease term. b. The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise. c. The lease term is for the major part of the remaining economic life of the underlying asset. However, if the commencement date falls at or near the end of the economic life of the underlying asset, this criterion shall not be used for purposes of classifying the lease. d. The present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments in accordance with paragraph 842-10-30-5(f) equals or exceeds substantially all of the fair value of the underlying asset. e. The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. (FASB: 842-10-25-3): When none of the criteria in paragraph 842-10-25-2 are met: a. A lessee shall classify the lease as an operating lease. b. A lessor shall classify the lease as either a direct financing lease or an operating lease. A lessor shall classify the lease as an operating lease unless both of the following criteria are met, in which case the lessor shall classify the lease as a direct financing lease: The present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments in accordance with paragraph 842-10-30-5(f) and/or any other third party unrelated to the lessor equals or exceeds substantially all of the fair value of the underlying asset. It is probable that the lessor will collect the lease payments plus any amount necessary to satisfy a residual value guarantee. (FASB: 842-10-25-3A): Notwithstanding the requirements in paragraphs 842-10-25-2 through 25-3, a lessor shall classify a lease with variable lease payments that do not depend on an index or a rate as an operating lease at lease commencement if classifying the lease as a sales-type lease or a direct financing lease would result in the recognition of a selling loss. (FASB: 842-10-55-2):  When determining lease classification, one reasonable approach to assessing the criteria in paragraphs 842-10-25-2(c) through (d) and 842-10-25-3(b)(1) would be to conclude: a. Seventy-five percent or more of the remaining economic life of the underlying asset is a major part of the remaining economic life of that underlying asset. b. A commencement date that falls at or near the end of the economic life of the underlying asset refers to a commencement date that falls within the last 25 percent of the total economic life of the underlying asset. c. Ninety percent or more of the fair value of the underlying asset amounts to substantially all the fair value of the underlying asset.

Collectibility:

Summary Guidance: Collectibility is relevant in determining proper accounting of the lease transaction as follows:

At Start of Lease:

  1. Operating Lease

    1. When Collectibility is Probable - Revenue recognized is based on the calculated straight-line revenue

    2. When Collectibility is not Probable - Revenue recognized based on the lower of cumulative actual cash receipts vs cumulative straight-line revenue

  2. Sales-Type Lease

    1. When Collectibility is Probable - Underlying asset is derecognized, and Net Investment in Lease and Selling profit is recognized

    2. When Collectibility is not Probable - Underlying asset is kept in the books, and depreciation is accumulated until collectible. While still not collectible, a deposit liability is recognized for each actual lease payment received.

  3. Direct Financing Lease

    1. When Collectibility is Probable - Underlying asset is derecognized, and Net Investment in Lease is recognized. Selling profit is deferred and recognized during the term of the lease.

    2. When Collectibility is not Probable - Not applicable and the lease will be classified as Operating Lease.

When collectibility is updated during the term of the lease:

  1. Operating Lease

    1. When Collectibility was Probable and changed to Not Probable - Revenue recognized based on the lower of cumulative actual cash receipts vs cumulative straight-line revenue

    2. When Collectibility was not Probable and changed to Probable - Revenue recognized is based on the calculated straight-line revenue

  2. Sales-Type Lease

    1. When Collectibility was Probable and changed to Not Probable - Classification is not updated. Impairment allowance under ASC 310 is performed against the Net Investment in Lease.

    2. When Collectibility was not Probable and changed to Probable- Underlying asset is derecognized, and Net Investment in Lease and Selling profit is recognized

  3. Direct Financing Lease

    1. When Collectibility was Probable and changed to Not Probable - Classification is not updated. Impairment allowance under ASC 310 is performed against the Net Investment in Lease.

    2. When Collectibility was not Probable - Not applicable.

From a lease classification perspective, collectibility is an added classification criteria when determining whether a lease qualifies as a direct financing lease, in addition to the inclusion of the residual value guarantees by third party.

Technical Guidance:

(FASB: 842-10-25-3) Direct Financing Lease: When none of the criteria in paragraph 842-10-25-2 are met: a. A lessee shall classify the lease as an operating lease. b. A lessor shall classify the lease as either a direct financing lease or an operating lease. A lessor shall classify the lease as an operating lease unless both of the following criteria are met, in which case the lessor shall classify the lease as a direct financing lease: The present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments in accordance with paragraph 842-10-30-5(f) and/or any other third party unrelated to the lessor equals or exceeds substantially all of the fair value of the underlying asset. It is probable that the lessor will collect the lease payments plus any amount necessary to satisfy a residual value guarantee. (FASB: 842-30-25-3) Sales Type Lease: The guidance in paragraphs 842-30-25-1 through 25-2 notwithstanding, if collectibility of the lease payments, plus any amount necessary to satisfy a residual value guarantee provided by the lessee, is not probable at the commencement date, the lessor shall not derecognize the underlying asset but shall recognize lease payments received—including variable lease payments—as a deposit liability until the earlier of either of the following: a. Collectibility of the lease payments, plus any amount necessary to satisfy a residual value guarantee provided by the lessee, becomes probable. If collectibility is not probable at the commencement date, a lessor shall continue to assess collectibility to determine whether the lease payments and any amount necessary to satisfy a residual value guarantee are probable of collection. b. Either of the following events occurs: The contract has been terminated, and the lease payments received from the lessee are nonrefundable. The lessor has repossessed the underlying asset, it has no further obligation under the contract to the lessee, and the lease payments received from the lessee are nonrefundable. (FASB: 842-30-25-4) Sales Type Lease: When collectibility is not probable at the commencement date, at the date the criterion in paragraph 842-30-25-3(a) is met (that is, the date at which collectibility of the lease payments plus any amount necessary to satisfy a residual value guarantee provided by the lessee is assessed as probable), the lessor shall do all of the following: a. Derecognize the carrying amount of the underlying asset b. Derecognize the carrying amount of any deposit liability recognized in accordance with paragraph 842-30-25-3 c. Recognize a net investment in the lease on the basis of the remaining lease payments and remaining lease term, using the rate implicit in the lease determined at the commencement date d. Recognize selling profit or selling loss calculated as: The lease receivable; plus the carrying amount of the deposit liability; minus the carrying amount of the underlying asset, net of the unguaranteed residual asset (FASB: 842-30-25-5) Sales Type Lease: When collectibility is not probable at the commencement date, at the date the criterion in paragraph 842-30-25-3(b) is met, the lessor shall derecognize the carrying amount of any deposit liability recognized in accordance with paragraph 842-30-25-3, with the corresponding amount recognized as lease income. (FASB: 842-30-25-6) Direct Financing & Sales Type Lease: If collectibility is probable at the commencement date for a sales-type lease or for a direct financing lease, a lessor shall not reassess whether collectibility is probable. Subsequent changes in the credit risk of the lessee shall be accounted for in accordance with the impairment guidance applicable to the net investment in the lease in paragraph 842-30-35-3. (FASB: 842-30-25-12) Operating Lease: If collectibility of the lease payments plus any amount necessary to satisfy a residual value guarantee (provided by the lessee or any other unrelated third party) is not probable at the commencement date, lease income shall be limited to the lesser of the income that would be recognized in accordance with paragraph 842-30-25-11(a) through (b) or the lease payments, including variable lease payments, that have been collected from the lessee. (FASB: 842-30-25-13) Operating Lease: If the assessment of collectibility changes after the commencement date, any difference between the lease income that would have been recognized in accordance with paragraph 842-30-25-11(a) through (b) and the lease payments, including variable lease payments, that have been collected from the lessee shall be recognized as a current-period adjustment to lease income.

Variable & Other Payments (Lessee):

Summary Guidance: This is an optional section in the software that can be used to track Variable Lease Expenses and Non-Lease Payments. The reason for including each is discussed below.

Variable Lease Expense is a required disclosure. While including this information in the software is optional, it is recommended for ease in populating your disclosure.

The different types of Variable Lease Payments, and the accounting treatment for each are summarized below.

Types of Payments

Lease Payment (used to measure Lease Liability)

Variable Lease Expense (period expense)

Payments dependent on an index or a rate initially measured at the Start Date. See Example 1 below.

X

 

Payments dependent on an index or a rate that change after the Start Date. See Example 1 below.

 

X

Payments that vary because of changes in circumstances, not related to an index or rate (e.g., % of sales). See Example 2 & 3 below.

 

X

Examples of Payments Lease Payment Variable Lease Expense Example 1: Three-year office lease with $100/year to increase by a cost of living index each year. Actual payments are $100 in year 1, $102 in Year 2, $103 in Year 3. Yr1: $100 Yr2: $100 Yr3: $100 Yr1: $0 Yr2: $2 Yr3: $1 Example 2: Three-year office lease with $100/year and annual real estate taxes bill at $20/year but trued up at the end of the each Year. The tax true ups are as follows: Year 1- $10, Year 2- $30, Year 3 - $50 Yr1: $120 Yr2: $120 Yr3: $120 Yr1: $10 Yr2: $30 Yr3: $50 Example 3: Three-year lease with payments based on 2% of sales. Sales were $10,000, $11,000 and $12,000 in Years 1-3 Yr1: $200 Yr2: $220 Yr3: $240

Non-Lease Payments are any payments that are not deemed Lease Payments or Variable Lease Expenses, such as Non-Lease components. An example of a Non-Lease component (transfer of a good or service) is payment for common area maintenance.

Technical Guidance:

(FASB: 842, Glossary): Variable Lease Payments: Variable lease payments are defined as payments made by a lessee to a lessor for the right to use an underlying asset that vary because of changes in facts or circumstances occurring after the commencement date (Start Date), other than the passage of time. Variable lease payments not based on an index or a rate (e.g., the Consumer Price Index or a market interest rate) should be entered in the “Variable Expense & Non-Lease Payments tab” as they are not deemed Lease Payments. Examples include a) payments based on a % of sales or based on the number of hours an asset is used, or b) real estate taxes that are not fixed. See examples at FASB: 842-10-141, 842-10-55-150 through 154 and 842-10-55-232 through 234. Variable lease payments that depend on an index or a rate initially measured using the index or rate at the commencement date are "Lease Payments" and should be entered in “Lease Payment and Classification tab.” Each time there is a change in the payment resulting from a change in the reference index or rate, record as a period expense, which can be entered in the “Variable Expense & Non-Lease Payments tab”. See Examples at FASB: 842-10-55-225 through 231. (FASB: 842, Page 5): Nonlease Components: Topic 842 requires an entity to separate the lease components from the nonlease components (for example, maintenance services or other activities that transfer a good or service to the customer) in a contract. Although this was a requirement in previous GAAP, Topic 842 provides more guidance on how to identify and separate components than previous GAAP. Only the lease components must be accounted for in accordance with Topic 842. The consideration in the contract is allocated to the lease and nonlease components on a relative standalone price basis for lessees. Consideration attributable to nonlease components is not a Lease Payment and, therefore, is not included in the measurement of lease assets or lease liabilities. Entities should account for nonlease components in accordance with other applicable Topics. (FASB: 842-10-15-37): As a practical expedient, a lessee may, as an accounting policy election by class of underlying asset, choose not to separate nonlease components from lease components and instead to account for each separate lease component and the nonlease components associated with that lease component as a single lease component (FASB: 842-10-55-37): Obligations imposed by a lease agreement to return an underlying asset to its original condition if it has been modified by the lessee (for example, a requirement to remove a lessee-installed leasehold improvement) generally would not meet the definition of lease payments or variable lease payments and would be accounted for in accordance with Subtopic 410-20 on asset retirement and environmental obligations. In contrast, costs to dismantle and remove an underlying asset at the end of the lease term that are imposed by the lease agreement generally would be considered lease payments or variable lease payments.

Variable & Non-Lease Receipts (Lessor):

Summary Guidance: This is an optional section in the software that can be used to track variable lease and Non-Lease receipts.

Variable Lease Receipt is a required footnote disclosure. While including this information in the software is optional, it is recommended for ease in populating your disclosure

The different types of variable lease receipts, and the accounting treatment for each are summarized below.

Types of Variable Lease Receipts

Lease Receipts

Variable Lease Revenue (period expense)

Receipts dependent on an index or a rate initially measured at the Start Date. See Example 1 below.

X

 

Receipts dependent on an index or a rate that change after the Start Date. See Example 1 below.

 

X

Payments that vary because of changes in circumstances, not related to an index or rate (e.g., % of sales). See Examples 2 & 3 below.

 

X

 

Residual Value Guarantee

 

X

At the end of the term, record as a Variable Lease Receipt (in the Variable and Non-Lease Receipts tab).

 

Examples of Receipts Lease Receipt Variable Lease Revenue Example 1: Three-year office lease with $100/year to increase by a cost of living index each year. Actual receipts are $100 in Year 1, $102 in Year 2, $103 in Year 3. Yr1: $100 Yr2: $100 Yr3: $100 Yr1: $0 Yr2: $2 Yr3: $1 Example 2: Three-year office lease with $100/year and annual real estate taxes bill at $20/year but trued up at the end of the each Year. The tax true ups are as follows: Year 1- $10, Year 2- $30, Year 3 - $50 Yr1: $120 Yr2: $120 Yr3: $120 Yr1: $10 Yr2: $30 Yr3: $50 Example 3: Three-year lease with receipts based on 2% of sales. Sales were $10,000, $11,000 and $12,000 in Years 1-3 Yr1: $200 Yr2: $220 Yr3: $240 Example 4: Three-year office lease with $100/year paid in arears. Residual Value Guarantee by Lessee of $150 were expected at end of lease term. Furthermore, actual amount paid as a Residual Value Guarantee was $180. Initial: Yr1: $100 Yr2: $100 Yr3: $100 Yr3-$180

Non-Lease Receipts are any receipts that are not deemed Lease Receipts or Variable Lease Revenue, such as Non-Lease components. An example of a Non-Lease component (transfer of a good or service) is a receipt related to common area maintenance.

Technical Guidance:

(FASB: 842, Page 5): Nonlease Components: Topic 842 requires an entity to separate the lease components from the non-lease components (for example, maintenance services or other activities that transfer a good or service to the customer) in a contract. (FASB: 842, Glossary): Lease Payments: See paragraph 842-10-30-5 for what constitutes lease payments from the perspective of a lessee and a lessor. Variable Lease Payments: Variable lease payments are defined as payments made by a lessee to a lessor for the right to use an underlying asset that vary because of changes in facts or circumstances occurring after the commencement date (Start Date), other than the passage of time. See examples: 842-10-55-141, 842-10-55-150 through 158 and 842-10-55-232 through 234. Variable lease receipts not based on an index or a rate (e.g., Consumer Price Index or a market interest rate) should be entered in the Variable & Non-Lease Receipts tab as they are not deemed Lease Receipts. Examples include a) payments based on a % of sales or based on the number of hours an asset is used, or b) real estate taxes that are not fixed. See examples at FASB: 842-10-141, 842-10-55-150 through 154 and 842-10-55-232 through 234. Variable lease payments that depend on an index or a rate initially measured using the index or rate at the commencement date are "Lease Payments" and should be entered in “Lease Payment and Classification Section.” Each time there is a change in the payment resulting from a change in the reference index or rate, record as a period expense, which can be entered in this section titled, "Payment Stream for Variable Expense and Non-Lease Payments." See Examples at FASB: 842-10-55-225 through 231. (FASB: 842-10-15-30): The consideration in the contract shall be allocated to each separate lease component and nonlease component of the contract (see paragraphs 842-10-15-33 through 15-37 for lessee allocation guidance and paragraphs 842-10-15-38 through 15-42 for lessor allocation guidance). Components of a contract include only those items or activities that transfer a good or service to the lessee. Consequently, the following are not components of a contract and do not receive an allocation of the consideration in the contract: a. Administrative tasks to set up a contract or initiate the lease that do not transfer a good or service to the lessee b. Reimbursement or payment of the lessor’s costs. For example, a lessor may incur various costs in its role as a lessor or as owner of the underlying asset. A requirement for the lessee to pay those costs, whether directly to a third party or as a reimbursement to the lessor, does not transfer a good or service to the lessee separate from the right to use the underlying asset. (FASB: 842-10-15-39A to 40A): 39A A lessor may make an accounting policy election to exclude from the consideration in the contract and from variable payments not included in the consideration in the contract all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific lease revenue-producing transaction and collected by the lessor from a lessee (for example, sales, use, value added, and some excise taxes). Taxes assessed on a lessor’s total gross receipts or on the lessor as owner of the underlying asset shall be excluded from the scope of this election. A lessor that makes this election shall exclude from the consideration in the contract and from variable payments not included in the consideration in the contract all taxes within the scope of the election and shall comply with the disclosure requirements in paragraph 842-30-50-14. 40A The guidance in paragraph 842-10-15-40 notwithstanding, a lessor shall exclude from variable payments lessor costs paid by a lessee directly to a third party. However, costs excluded from the consideration in the contract that are paid by a lessor directly to a third party and are reimbursed by a lessee are considered lessor costs that shall be accounted for by the lessor as variable payments (this requirement does not preclude a lessor from making the accounting policy election in paragraph 842-10-15-39A). (FASB: 842-10-15-42A to 42C): 42A As a practical expedient, a lessor may, as an accounting policy election, by class of underlying asset, choose to not separate nonlease components from lease components and, instead, to account for each separate lease component and the nonlease components associated with that lease component as a single component if the nonlease components otherwise would be accounted for under Topic 606 on revenue from contracts with customers and both of the following are met: a. The timing and pattern of transfer for the lease component and nonlease components associated with that lease component are the same. b. The lease component, if accounted for separately, would be classified as an operating lease in accordance with paragraphs 842-10-25-2 through 25-3 42B A lessor that elects the practical expedient in paragraph 842-10- 15-42A shall account for the combined component: a. As a single performance obligation entirely in accordance with Topic 606 if the nonlease component or components are the predominant component(s) of the combined component. In applying Topic 606, the entity shall do both of the following: Use the same measure of progress as used for applying paragraph 842-10-15-42A(a) Account for all variable payments related to any good or service, including the lease, that is part of the combined component in accordance with the guidance on variable consideration in Topic 606. b. Otherwise, as an operating lease entirely in accordance with this Topic. In applying this Topic, the entity shall account for all variable payments related to any good or service that is part of the combined component as variable lease payments. In determining whether a nonlease component or components are the predominant component(s) of a combined component, a lessor shall consider whether the lessee would be reasonably expected to ascribe more value to the nonlease component(s) than to the lease component. 42C A lessor that elects the practical expedient in paragraph 842-10- 15-42A shall combine all nonlease components that qualify for the practical expedient with the associated lease component and shall account for the combined component in accordance with paragraph 842-10-15-42B. A lessor shall separately account for nonlease components that do not qualify for the practical expedient. Accordingly, a lessor shall apply paragraphs 842-10-15-38 through 15- 42 to account for nonlease components that do not qualify for the practical expedient.

Lease Term Guidance Wizard

Lease Term Guidance Wizard: This wizard is meant to help you in 2 ways:

  • Guide you to correctly identify the lease term when there are early termination options and renewal options, as judgement is involved.

  • Create an audit trail of your answers for review by you, management, or your auditors

Lease Term:

Summary Guidance: The number of months from the Start Date to the End Date.

  • The Start Date is not the date you sign the lease but instead is the Commencement Date of the lease, which is defined as the date on which the Lessor makes an underlying asset available for use by a Lessee.

  • The End Date is typically the last day of the lease. However, you must consider early termination options and renewal options.

    • If you determine that you will exercise an early termination option because you are reasonably certain to end the lease prior to its stated end date, then use the date of the early termination option as the End Date.

      • A lease is no longer enforceable when both the Lessee and Lessor have the right to terminate without permission from the other party with no more than an insignificant penalty.

    • If you determine that you will exercise one or more renewal options, because you are reasonably certain to continue the lease, use the last day of the renewal option as the end date.

Technical Guidance:

(FASB: 842-10-30-1): Lease Term is the noncancellable period for which a lessee has the right to use an underlying asset, together with all of the following: a. Periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option b. Periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option (i.e., bypassing an early termination option) c. Periods covered by an option to extend (or not to terminate) the lease in which exercise of the option is controlled by the lessor. (FASB: 842-10-30-2): At the commencement date, an entity shall include the periods described in paragraph 842-10-30-1 in the lease term having considered all relevant factors that create an economic incentive for the lessee (that is, contract-based, asset-based, entity-based, and market-based factors). Those factors shall be considered together, and the existence of any one factor does not necessarily signify that a lessee is reasonably certain to exercise or not to exercise an option. (FASB: 842-10-30-3): At the commencement date, an entity shall assess an option to purchase the underlying asset on the same basis as an option to extend or not to terminate a lease, as described in paragraph 842-10-30-2. (FASB: 842-10-30-4): See paragraphs 842-10-55-19 through 55-21 for implementation guidance on commencement date and paragraphs 842-10-55-23 through 55-27 for implementation guidance on lease term and purchase options. See Examples 23 through 24 (paragraphs 842-10-55-210 through 55-224) for illustrations of the requirements on purchase options. (FASB: 842-10-55-23): An entity should determine the noncancellable period of a lease when determining the lease term. When assessing the length of the noncancellable period of a lease, an entity should apply the definition of a contract and determine the period for which the contract is enforceable. A lease is no longer enforceable when both the lessee and the lessor each have the right to terminate the lease without permission from the other party with no more than an insignificant penalty.

Reasonably Certain:

Summary Guidance: It is an assessment considering the following economic incentives/factors relevant to that assessment:

  1. Contract-based factors

  2. Asset-based factors

  3. Market-based factors

  4. Entity-based factors

An entity’s assessment will often require the consideration of a combination of those factors, as they are interrelated.

Technical Guidance:

(FASB: 842-10-55-26): At the commencement date, an entity assesses whether the lessee is reasonably certain to exercise or not to exercise an option by considering all economic factors relevant to that assessment—contract-based, asset-based, market-based, and entity-based factors. An entity’s assessment often will require the consideration of a combination of those factors because they are interrelated. Examples of these economic factors include but are not limited to: a. Contractual terms and conditions for the optional periods compared with current market rates, such as: The amount of Lease Payments in any optional period The amount of any variable lease payments or other contingent payments, such as payments under termination penalties and residual value guarantees The terms and conditions of any options that are exercisable after initial optional periods (for example, the terms and conditions of a purchase option that is exercisable at the end of an extension period at a rate that is currently below market rates). b. Significant leasehold improvements that are expected to have significant economic value for the lessee when the option to extend or terminate the lease or to purchase the underlying asset becomes exercisable. c. Costs relating to the termination of the lease and the signing of a new lease, such as negotiation costs, relocation costs, costs of identifying another underlying asset suitable for the lessee’s operations, or costs associated with returning the underlying asset in a contractually specified condition or to a contractually specified location. d. The importance of that underlying asset to the lessee’s operations, considering, for example, whether the underlying asset is a specialized asset and the location of the underlying asset.

Lease Classification Wizard

Classification:

Summary Guidance: There are several Lease Classification depending on whether the party is a Lessee or a Lessor under FASB.

 

FASB ASC 842

 

FASB ASC 842

Lessee

Operating Leases

Finance Leases

Lessor

Operating Leases

Sales-Type Leases

Direct Financing Leases

For FASB ASC 842, A lease that meets at least one of the criteria below will be classified as a Finance Lease (if a Lessee) or Sales-Type Lease (if a Lessor).

Classification Criteria:
a. Transfers ownership to Lessee
b. Option to purchase that Lessee is reasonably certain to exercise
c. Lease Term is a major part (e.g., 75%) of its economic life (life of the asset by all users, not just the Lessee)
d. Present value of lease payments and residual value guarantee by Lessee that is substantially all (e.g., 90%) of the fair market value
e. Leased asset has no future use by Lessor

Additional Classification Criteria for Lessors:

Direct-Financing Lease if both of the following are met:

  • Present value of lease payments and residual value guarantee by Lessee and/or third party that is substantially all (e.g., 90%) of the fair market value.

  • It is probable that the Lessor will collect the lease payments, plus any amount necessary to satisfy a residual value guarantee.

A Lessor shall classify a lease with variable lease payments that do not depend on an index or a rate as an operating lease at lease commencement if classifying the lease as a sales-type lease or a direct financing lease would result in the recognition of a selling loss.

Technical Guidance:

(FASB: 842-10-25-1 to 3, 3A): 1 An entity shall classify each separate lease component at the commencement date. An entity shall not reassess the lease classification after the commencement date unless the contract is modified and the modification is not accounted for as a separate contract in accordance with paragraph 842-10-25-8. In addition, a lessee also shall reassess the lease classification after the commencement date if there is a change in the lease term or the assessment of whether the lessee is reasonably certain to exercise an option to purchase the underlying asset. When an entity (that is, a lessee or lessor) is required to reassess lease classification, the entity shall reassess classification of the lease on the basis of the facts and circumstances (and the modified terms and conditions, if applicable) as of the date the reassessment is required (for example, on the basis of the fair value and the remaining economic life of the underlying asset as of the date there is a change in the lease term or in the assessment of a lessee option to purchase the underlying asset or as of the effective date of a modification not accounted for as a separate contract in accordance with paragraph 842-10-25-8). 2 A lessee shall classify a lease as a finance lease and a lessor shall classify a lease as a sales-type lease when the lease meets any of the following criteria at lease commencement: a. The lease transfers ownership of the underlying asset to the lessee by the end of the lease term. b. The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise. c. The lease term is for the major part of the remaining economic life of the underlying asset. However, if the commencement date falls at or near the end of the economic life of the underlying asset, this criterion shall not be used for purposes of classifying the lease. d. The present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments in accordance with paragraph 842-10-30-5(f) equals or exceeds substantially all of the fair value of the underlying asset. e. The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. 3 When none of the criteria in paragraph 842-10-25-2 are met: a. A lessee shall classify the lease as an operating lease. b. A lessor shall classify the lease as either a direct financing lease or an operating lease. A lessor shall classify the lease as an operating lease unless both of the following criteria are met, in which case the lessor shall classify the lease as a direct financing lease: The present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments in accordance with paragraph 842-10-30-5(f) and/or any other third party unrelated to the lessor equals or exceeds substantially all of the fair value of the underlying asset. It is probable that the lessor will collect the lease payments plus any amount necessary to satisfy a residual value guarantee. 3A Notwithstanding the requirements in paragraphs 842-10-25-2 through 25-3, a lessor shall classify a lease with variable lease payments that do not depend on an index or a rate as an operating lease at lease commencement if classifying the lease as a sales-type lease or a direct financing lease would result in the recognition of a selling loss. (FASB: 842-10-55-2):  When determining lease classification, one reasonable approach to assessing the criteria in paragraphs 842-10-25-2(c) through (d) and 842-10-25-3(b)(1) would be to conclude: a. Seventy-five percent or more of the remaining economic life of the underlying asset is a major part of the remaining economic life of that underlying asset. b. A commencement date that falls at or near the end of the economic life of the underlying asset refers to a commencement date that falls within the last 25 percent of the total economic life of the underlying asset. c. Ninety percent or more of the fair value of the underlying asset amounts to substantially all the fair value of the underlying asset.

Major Part:

Summary Guidance: Generally, the Lease Term is considered a Major Part of the asset’s economic life if the Lease Term is at least 75% of the asset’s economic life. Technical guidance has removed the bright line of 75%; however, that threshold is still considered a reasonable measurement. You may elect an alternate threshold in your lease accounting policy.

Note: If you have an underlying asset type (e.g., office lease) in which you cannot determine the true economic life of the underlying asset, but the number is so large that the answer is positively "No" to the question, you may want to determine a policy to enter the same large number (1,000 months) in order to achieve a “No” answer.

Technical Guidance:

(FASB: 842-10-25-2): The Lease Term is for the major part of the remaining economic life of the underlying asset. However, if the commencement date (Start Date) falls at or near the end of the economic life of the underlying asset, this criterion shall not be used for purposes of classifying the lease. (FASB: 842-10-55-2 (a)): Seventy-five percent or more of the remaining economic life of the underlying asset is a major part of the remaining economic life of that underlying asset. (FASB: 842, Page 23): Economic Life is either the period over which an asset is expected to be economically usable by one or more users or the number of production or similar units expected to be obtained from an asset by one or more users. Economic life is longer useful life (term used to determine ROU Asset Life) because it is the period by which all of the users can utilize the asset, while useful life is the period by which the lessee (only) will utilize the asset.

Substantially All:

Summary Guidance: The present value of the Lease Payments is Substantially All of the leased asset’s fair market value. Historically, 90% was used as the threshold to measure Substantially All. Technical guidance has removed this bright line; however, the threshold is still considered a reasonable measure. You may elect an alternative threshold in your lease accounting policy.

Note: If you have an underlying asset type (e.g., office lease) in which you cannot determine the true fair value of the underlying asset, but the number is so large that the answer is positively "No" to the question, you may want to determine a policy to enter the same large number ($1,000,000,000) in order to achieve a “No” answer.

Technical Guidance:

(FASB: 842-10-25-2): The present value of the sum of the Lease Payments and any residual value guaranteed by the lessee that is not already reflected in the Lease Payments in accordance with paragraph 842-10-30-5(f) equals or exceeds substantially all of the fair value of the underlying asset. (FASB: 842-10-55-2 (c)): Ninety percent or more of the fair value of the underlying asset amounts to substantially all the fair value of the underlying asset.

Reasonably Certain:

Summary Guidance: It is an assessment considering the following economic incentives/factors relevant to that assessment:

  1. Contract-based factors

  2. Asset-based factors

  3. Market-based factors

  4. Entity-based factors

An entity’s assessment will often require the consideration of a combination of those factors, as they are interrelated.

Technical Guidance:

(FASB: 842-10-55-26): At the commencement date, an entity assesses whether the lessee is reasonably certain to exercise or not to exercise an option by considering all economic factors relevant to that assessment—contract-based, asset-based, market-based, and entity-based factors. An entity’s assessment often will require the consideration of a combination of those factors because they are interrelated. Examples of these economic factors include but are not limited to: a. Contractual terms and conditions for the optional periods compared with current market rates, such as: The amount of Lease Payments in any optional period The amount of any variable lease payments or other contingent payments, such as payments under termination penalties and residual value guarantees The terms and conditions of any options that are exercisable after initial optional periods (for example, the terms and conditions of a purchase option that is exercisable at the end of an extension period at a rate that is currently below market rates). b. Significant leasehold improvements that are expected to have significant economic value for the lessee when the option to extend or terminate the lease or to purchase the underlying asset becomes exercisable. c. Costs relating to the termination of the lease and the signing of a new lease, such as negotiation costs, relocation costs, costs of identifying another underlying asset suitable for the lessee’s operations, or costs associated with returning the underlying asset in a contractually specified condition or to a contractually specified location. d. The importance of that underlying asset to the lessee’s operations, considering, for example, whether the underlying asset is a specialized asset and the location of the underlying asset.

Edit Revision Assistant

Summary Guidance: Adding a Revision is how you amend, modify, remeasure, or change a lease at or before the end of the lease. To add a Revision, complete the following steps:

  • On the My Leases tab, click the vertical ellipses on the applicable lease and select Edit to display the Edit Revision Assistant

  • Select any of the Modification, Remeasurement, and Other options and select Continue

  • Enter the Revision Date and select Save and Continue

This will freeze the lease and then allow you to change parameters that only affect the lease on/after the date of the Revision.

Add Revision (Lessee):

Refer to the below section for further details and guidance to Lessee Revisions.

Modification: This is an amendment to a lease (including full or partial lease termination). Full Termination: If a Term of 1 month is entered, the ROU Asset & Lease Liability will be reduced to zero on the Revision Date, with any difference booked to the Gain/Loss Account selected in GL Accounts tab.  Partial Termination: A reduction in scope (e.g., reducing square feet of an office lease). See below for guidance on steps for completion. If the following applies, do not create a Revision of the original lease; instead, create a new lease for only the Modification (amendment): Modification grants an additional right of use not in the original lease (e.g., original lease includes 10,000 sq. ft. and amendment includes an additional 2,000 sq. ft.). Lease payments increased commensurate with standalone price of additional right of use. Remeasurement: Reassess lease due to an event (i.e., no contract amendment). A remeasurement comes in the following forms: Contingency resolved such that variable lease payments become fixed. Change in amounts probable under residual value guarantee. Reassessment of: lease term (early termination or renewal) or purchase option ONLY IF one of the following events occurs: Significant event/change in circumstances that is in control of Lessee that affects whether they exercise or not exercise an option Event occurs (that was previously written into the contract) that obliges the Lessee to exercise or not exercise an option Lessee elects to exercise an option (when previously determined they wouldn't) Lessee elects to not to exercise an option (when previously determined they would) Change in index: Change in payments tied to an index (e.g., cost-of-living adjustment). Change in floating interest rate: Change in payments tied to a floating interest rate (e.g., LIBOR). Impairment of ROU Asset: After a revision is created, enter the ROU Asset value after impairment in the Revision Information tab. The adjustment to the ROU Asset is recognized in a Gain/Loss Account. If impairment and modification occur at the same time, follow the steps below in order: Create a Modification revision (click Edit > Modify terms or payments and fill in required fields) Create an Impairment revision, one month following previous revision (click Edit > Impairment of ROU Asset and fill in required fields) Derecognize ROU asset under certain subleases: The original Lessee (as sublessor) shall continue to account for the original lease in one of the following ways: If the sublessor classifies the sublease as an operating lease, account for the original lease the same as before the sublease. If the sublessor classifies the sublease as a finance lease, account for the original lease by derecognizing the ROU Asset and accounting for the liability the same as before the sublease. In the software: Click Edit then select Derecognize ROU Asset Enter the Revision Date and select Save and Continue On Description & Term tab, Input ROU Asset Life = 0, which causes the value of the ROU Asset to be transferred to a Gain/Loss Account. Reverse the Gain/Loss Account as part of the initial entry as a Lessor of the subleased asset (outside of scope of the software).   Qualitative Lease Information: This Revision is not part of the technical guidance, but rather a practical consideration in which you can change a parameter of the lease (e.g., Location, GL Accounts, Cost Centers) in the middle of the lease, allowing the Lessee to report on that lease differently from the date of the Revision. Revision Types: The chart below explains which field values the software carries forward from the prior revision of the lease (“S” for Same) and which field values require user to input data (“Update”) based on revision type. Revision Type Historical fx Rate (1) Discount Rate (2) Classification (3) Modification | Change lease term or timing/value of lease payments (including Full termination) Update Update Update Modification | Partial Termination Update Update Update Remeasurement | Contingency resolved variable to fixed S S S Remeasurement | Change in amounts probable under Residual Value Guarantee S S S Remeasurement | Reassessment of options: exercise of termination, renewal or purchase option(s) Update Update Update Impairment of ROU Asset S S S Derecognize ROU Asset under certain subleases S S S Qualitative Lease Information: change lease data in the middle of the lease (e.g, location, GL accounts) S S S (1) Historical FX Rate:  No technical guidance exists as to updating Historical fx Rate (when local currency is different than functional currency) for a Revision, other than a SEC inquiry response. The SEC response is to follow the same technical guidance as to when to update the Discount Rate or reassess Classification (see Discount & Classification columns in the table above and technical references in (2) & (3) below). (2) Discount Rate: (FASB: 842-20-35-5) If there is a remeasurement of the lease liability in accordance with paragraph 842-20-35-4, the lessee shall update the discount rate for the lease at the date of remeasurement on the basis of the remaining lease term and the remaining lease payments unless the remeasurement of the lease liability is the result of one of the following: A change in the lease term or the assessment of whether the lessee will exercise an option to purchase the underlying asset and the discount rate for the lease already reflects that the lessee has an option to extend or terminate the lease or to purchase the underlying asset. A change in amounts probable of being owed by the lessee under a residual value guarantee (see paragraph 842-10-35-4(c)(3)). A change in the lease payments resulting from the resolution of a contingency upon which some or all of the variable lease payments that will be paid over the remainder of the lease term are based (see paragraph 842-10-35-4(b)). (3) Classification: (FASB: 842-10-25-1) An entity shall classify each separate lease component at the commencement date. An entity shall not reassess the lease classification after the commencement date unless the contract is modified and the modification is not accounted for as a separate contract in accordance with paragraph 842-10-25-8. In addition, a lessee also shall reassess the lease classification after the commencement date if there is a change in the lease term or the assessment of whether the lessee is reasonably certain to exercise an option to purchase the underlying asset. When an entity (that is, a lessee or lessor) is required to reassess lease classification, the entity shall reassess classification of the lease on the basis of the facts and circumstances (and the modified terms and conditions, if applicable) as of the date the reassessment is required (for example, on the basis of the fair value and the remaining economic life of the underlying asset as of the date there is a change in the lease term or in the assessment of a lessee option to purchase the underlying asset or as of the effective date of a modification not accounted for as a separate contract in accordance with paragraph842-10-25-8). (FASB 842-10-25-9) If a lease is modified and that modification is not accounted for as a separate contract in accordance with paragraph 842-10-25-8, the entity shall reassess the classification of the lease in accordance with paragraph 842-10-25-1 as of the effective date of the modification. Technical Guidance: The technical guidance for all types of Revisions is too extensive to restate, but the main provisions are referenced below: ASC 842: Modifications: (842-10-25-8 to 14) Remeasurements: (842-10-35-1 to 5, 842-10-55-28 to 29) Impairment: (842-20-35-9 to 11, 842-20-25-7) Derecognize ROU Asset under certain subleases: (842-20-35-14)

Add Revision (Lessor):

Refer to the below section for further details and guidance to Lessor Revisions.

Modification: This is an amendment to a lease (including full or partial lease termination). Full Termination: If a Term of 1 month is entered, the LT & ST Deferred Rent and Initial Direct Cost Asset will be reduced to zero on the Revision Date, with any difference booked to the Gain/Loss Account selected in the GL Accounts tab.  Remeasurement: Reassess lease due to an event (i.e., no contract amendment). A remeasurement comes in the following forms: Exercise of a) lease term (early termination or renewal) or b) purchase option ONLY IF one of the following events occurs: Event occurs (that was previously written into the contract) that obliges the Lessee to exercise or not exercise an option* Lessee elects to exercise an option* (when previously determined it wouldn't) Lessee elects to not to exercise an option* (when previously determined it would) *option can be an early termination option, renewal option or option to purchase the underlying asset Update Residual Value Guarantees at end of term for actual amount received. Change in receipts due to a change in an index (e.g., cost-of-living adjustment) used to determine those receipts. Change in receipts due to payments tied to a floating interest rate (e.g., LIBOR) used to determine those receipts. Qualitative Lease Information: This Revision is not part of the technical guidance, but rather a practical consideration in which you can change a parameter of the lease (e.g., Location, GL Accounts, Cost Centers) in the middle of the lease, allowing the Lessor to report on that lease differently from the date of the Revision. Lessor Revision Types: The chart below explains which field values to carry forward from the prior revision of the lease (“S” for Same) and which field values require user to input data (“Update”) based on revision type. Revision Type Historical fx Rate (1) Discount Rate (2) Classification (3) Modification | Change lease term or timing/value of lease receipts (including Full Termination) Update Update Update Remeasurement | Reassessment of options: exercise of termination, renewal, or purchase option(s) S S S Qualitative Lease Information: change lease data in the middle of the lease (e.g, location, GL accounts) S S S (1) Historical FX Rate:  No technical guidance exists as to updating Historical fx Rate (when local currency is different than functional currency) for a Revision, other than a SEC inquiry response. The SEC response is to follow the same technical guidance as to when to update the Discount Rate or reassess Classification (see Discount & Classification columns in the table above and technical references in (2) & (3) below). (2) Discount Rate: (FASB: 842-10-25-15 to 17, 842-30-30-1 to 4) (3) Classification: (FASB: 842-10-25-9) Technical Guidance: The technical guidance for all types of Revisions is too extensive to restate, but the main provisions are referenced below: Modifications: (842-10-25-15, 842-10-55-190 to 193) Remeasurements: (842-10-35-3, 842-10-35-6, 842-10-55-28 to 29)

Partial Termination: Update ROU Asset Value

Summary Guidance: Because you have selected Partial Termination, you have the option to enter a value to over-write the ROU asset, creating a Gain/Loss to the account selected in the GL Accounts tab. Follow the steps below:

  1. Create a Modification revision (click Edit > Partial Termination)

  2. Complete all required fields of this Revision without entering a new ROU Asset Value on the Revision Information tab.

  3. Export the Local Currency Amortization Schedule by selecting the lease, including all Revisions.

    1. GL Start Date: Month prior to Start of Revision

    2. GL End Date: Month of Revision

  4. The technical guidance offers two ways to calculate the new ROU Asset Value. Fill out the ROU Asset Calculator to determine the ROU Asset Value under either method. Edit the Revision and enter the updated ROU Asset Value in the Revision Information Tab

Technical Guidance:

(FASB: 842-10-25-13): In the case of (c) in paragraph 842-10-25-11, the lessee shall decrease the carrying amount of the right-of-use asset on a basis proportionate to the full or partial termination of the existing lease. Any difference between the reduction in the lease liability and the proportionate reduction in the right-of use asset shall be recognized as a gain or a loss at the effective date of the modification. See examples: (FASB: 842-10-55-181 to 185):