This tab contains settings needed to properly handle the transition from FAS 13 to ASC 842 for U.S. reporting entities, or IAS 17 to IFRS 16 for entities complying with IFRS (International Financial Reporting Standards), or FAS 13 to GASB 87 for U.S. governments. The new standards, the first major alteration to lease accounting in some 40 years, were released in early 2016. Implementation is generally required in 2019. GASB 87 was released in 2017 for implementation in 2020.
See the New Standard Updates function (on the File menu) to make mass changes to a database for the new standard.
Effective Date of New Standard
Most reporting entities must apply the new lease accounting standard (ASC 842/ IFRS 16) with the fiscal year that starts in 2019. To be precise, ASC 842 requires implementation by publicly-held entities for fiscal years starting after Dec. 15, 2018, while IFRS 16 requires implementation for fiscal years starting Jan. 1, 2019, or later, and GASB 87 requires implementation for fiscal years starting after Dec. 15, 2019. Earlier implementation is permitted, though IFRS 16 permits implementation no earlier than implementation of IFRS 15, Revenue from Contracts with Customers. ASC 842 permits delayed implementation for privately- held entities, including not-for-profits that have not issued listed securities; such entities may implement in the fiscal year starting on or after Dec. 15, 2020, and need not apply it until their year-end report (other entities must apply the new standard to quarterly or other interim reports).
Public entities and IFRS users with a calendar year fiscal year, then, should enter 1/1/2019. This is also called the implementation date.
ASC 842: The original release of ASC 842 required restating prior comparative years. For most U.S. entities, this means going back two fiscal years from the effective date. Operating leases, which are capitalized under ASC 842, are recalculated as of this earlier date. This is also called the transition date. For U.S. public entities using a calendar year fiscal year, this date should be 1/1/2017.
In July 2018, the FASB released ASU 2018-11, which permits implementing ASC 842 without restating prior periods. If you choose this option, the comparative period date should be the same as the implementation date.
GASB 87: Paragraph 93 calls for the change to the new standard to be applied retroactively to prior periods presented “if practicable.” To do this, specify the beginning of the prior periods presented as the application date. If restatement is not done, this date should be the same as the effective date above.
Default Standard to Use
Select whether by default to use the old lease accounting standard (FAS 13 or IAS 17, depending on whether you have chosen U.S. GAAP/GASB or IFRS accounting methodology) or the new lease accounting standard (ASC 842, IFRS 16, or GASB 87). This affects which classification you see when a lease is displayed, and which methodology is chosen by default when you create a report. You may select the alternative choice once the lease or report setup window is displayed.
Display Executory Costs
Choose whether or not to display executory costs both on the lease input form and on reports. Generally, this should be turned on for as long as you have active leases with executory costs. Leases that began before the transition date to ASC 842/IFRS 16/GASB 87 keep reporting executory costs to the end of their lease term, unless they are modified.
You must display either executory costs or non-lease components; you may choose to display both. See the Text tab to select how many types of executory costs to display.
Display Non-Lease Components
Choose whether or not to display non-lease components both on the lease input form and on reports. Generally, this should be turned on as soon as you start entering leases with non-lease components, which is required after the effective date of ASC 842/IFRS 16/GASB 87.
You must display either executory costs or non-lease components; you may choose to display both. See the Text tab to select how many types of non-lease components to display.
Prompt to Confirm Classification
Since ASC 842 is "principles-based," rather than "bright-line," you may want to review and potentially override the classification of each lease as it is entered. If you check this box, then each time you save a new lease or make a financial change to an existing lease, EZLease displays the results of the classification process (using the FAS 13 75% and 90% tests for finance vs. operating, though based on the ASC 842 definitions of rent and other numeric inputs) and allows you to override the result. This is the same as editing the lease and changing the classification.
Full Retrospective Application
IFRS only: IFRS users have the option to restate all leases using IFRS 16 accounting from inception, or to implement as a transition at the implementation date. If full retrospective application is chosen, the effect of applying the new standard (such as differing assets and liabilities recognized) is recorded as an adjustment to retained earnings.
Enable Low Value
While the Low Value classification is only explicitly authorized for IFRS 16 leases, ASC 842 and GASB 87 users may choose to use the Low Value classification for immaterial leases. To do this, check the Enable Low Value box, then enter a threshold maximum. (You can also mark a lease as Low Value directly once it is enabled.) This option is not displayed for IFRS 16, since Low Value is part of that standard.
Threshold for Low-Value Assets
IFRS only: IFRS users need not recognize as finance leases contracts for low-value assets. According to the Basis for Conclusions of IFRS 16, “the IASB had in mind leases of underlying assets with a value, when new, in the order of magnitude of US$5,000 or less.” [IFRS 16, BC100] Since your currency may not be
U.S. dollars, and “order of magnitude” allows room for individual variance, you may specify here the threshold below which a lease will be considered of Low Value. Low-value asset leases are treated like IAS 17 operating leases, with rent usually recognized on a straight-line basis. If you do not wish to use the automatic Low Value classification, enter 0 for the threshold. You can still designate an individual lease as being of low value by checking the appropriate box on the Inception tab of the lease record.
Note that the criterion stated is based on the value of the asset when new. If a lease is of a used asset, EZLease does not have the fair value of the asset when new. If a lease has an in-service date entered that is earlier than the begin date of the lease (indicating that the asset is used), and the fair value entered is below the threshold amount, EZLease asks you whether or not the lease should be considered low value.
To facilitate updates of your existing leases to comply with ASC 842/IFRS 16/ GASB 87, use the choices to change groups of leases.
Use the upload to enter settings needed for FAS 13/IAS 17 leases to comply with ASC 842/IFRS 16/GASB 87. There are two types of uploads: Classification and Rent.
Classification is used to enter information needed to classify the lease. A template spreadsheet, EZLease New Standard Upload Classification.xls, is provided in the installation folder of EZLease (usually C:\Program Files (x86)\LeaseAccelerator\ EZLease; remove (x86) if using 32-bit Windows). The following columns are required for the layout:
- Column A: Lease number
- Column B: Transition incremental borrowing rate
- Column C: Unamortized initial direct costs
- Column D: Expected guaranteed residual payments
- Column E: Low value lease (IFRS only, unless specially enabled in System Options)
- Column F: Calculate depreciation from inception (Retrospective asset calculation; IFRS only)
Column B is needed only for operating leases. If the lease starts before the transition date, the value entered is put in the Transition incremental borrowing rate. If the lease starts on or after the transition date, the value is put in the incremental borrowing rate field.
Column C is only for costs that are recognizable as initial direct costs under ASC 842/IFRS 16/GASB 87 (incremental costs that would not have been incurred had the lease not been completed, which excludes overhead and document preparation costs).
Column D is the amount of guaranteed residual you expect to pay. This is only meaningful for operating leases. It cannot be greater than the previously entered guaranteed residual.
Columns E and F may be entered as “Yes”, “Y”, “True”, or “T” to set the flag, or “No”, “N”, “False”, or “F’ to turn off the flag (if previously set). These columns are not applicable for US GAAP.
The Rent upload is used to enter executory costs. This is primarily intended for operating leases, since capital leases would already have executory costs entered. Under FAS 13/IAS 17, identifying executory costs for operating leases is unimportant, because the accounting is the same as for base rent. Setting up the lease for ASC 842/IFRS 16/GASB 87, however, separating the executory costs becomes significant, because rent identified as executory costs under FAS 13/IAS 17 does not have to be capitalized. (Different rules apply for lease & non-lease components for new leases under ASC 842/IFRS 16/GASB 87.)
A template spreadsheet, EZLease New Standard Upload Rent.xls, is provided in the installation folder of EZLease (usually C:\Program Files (x86)\LeaseAccelerator\EZLease; remove (x86) if using 32-bit Windows). The following columns are required for the layout:
- Column A: Lease number
- Column B: Executory costs
- Column C: Step end date (blank to set for all rent steps)
- Column D: Executory cost field # to use (default: 1)
You can set transition values for a group of, or all, leases. You may select all leases, individual leases from a list, or all leases with one or more entries in a particular user-defined field. If you choose a user-defined field, a secondary window opens to allow you to select entries to match on.
You may use this to set the transition incremental borrowing rate (discount rate to be used for existing operating leases), or (for IFRS users only) to set the Low Value flag. The transition incremental borrowing rate should be entered as a percentage; i.e., 4.5% is entered as 4.5. For Low Value, you may either set it on or off for all matching leases, or test all matching leases to see if they are above or below the standard low- value threshold that you set in System Options.
Split Land and Building Leases
Under FAS 13, a lease that includes both a land and a building component gets special treatment if the value of the land is 25% or more of the total value of the leased asset. In that case (and unless there is an ownership transfer or reasonably certain purchase option), the land is treated as operating, and rent equal to the land's fair value times the incremental borrowing rate is set aside as the annual portion of the rent applied to the land. The rest of the rent is capitalized if the building is considered capital. (IAS 17 calls for similar treatment, but without the specific 25% threshold.)
Under ASC 842/IFRS 16/GASB 87, the land is now capitalized as well as the building. Because finance and operating balance sheet values must be reported separately under ASC 842, and due to the complexity of recasting the operating portion of the lease while leaving the finance/capital portion unaffected, existing land and building leases (at least when the building is capital) must be split into two parts. Split Land and Building accomplishes this. For one or both of the resulting leases, specify a suffix that is automatically added to the lease number to distinguish the two leases.
It is not necessary to split land and building leases where the building is operating, but you may optionally split them.
If you wish to split the leases individually, display a lease and choose Split Land/ Building Lease from the Lease menu.
Splitting is not needed for IFRS users using full retrospective application.
Classify All Leases
Classify All Leases sets up the ASC 842/IFRS 16/GASB 87 classification for pre-transition leases. If you check the "Reclassify" box, it will also reset the classification for leases that start after the transition date. Reclassify is primarily intended for use if you change your planned implementation date for the new standard.
This sets the post-transition classification; for finance leases and ASC 842 operating leases, the proper discount rate is also determined.
Before you classify leases, you need to update the leases with the ASC 842/ IFRS 16/GASB 87 information. Please use the upload or group change to set the transition incremental borrowing rate and (IFRS) whether leases are of low-value assets; if you have (US) combined land and building leases with capital buildings, you should split them.
Valid classifications for ASC 842 Lessee leases: Finance, Operating, Short Term
Valid classifications for IFRS 16 Lessee leases: Finance, Low Value, Short Term Valid classifications for GASB 87 Lessee leases: Finance, Short Term
If a lease ends before the transition date, the new standard classification is “Not Applicable.” This is also assigned to the old standard for leases that start after the implementation date.