ASC 842 comes as the successor of ASC 840 (the previous standard for accounting for a lease). It deals with the leases undertaken by entities (both private and public) across all industries. While the accounting from a lessor perspective remains broadly unchanged, the accounting requirements for lessees see a significant change under ASC 842.
Per ASC 842, for any lease that is longer than 12 months, lessees are now required to apply a balance sheet model to their lease accounting. A lessee needs to recognize a liability and asset related to the specific lease.
Additionally, this standard also promulgates significant changes in the complex areas of lease accounting like sales and leasebacks, build-to-suit leasing arrangements, etc.
In this article, we will go through the disclosure requirements set forth by ASC 842. But before that, let’s make sure we are clear on the objective of these disclosure requirements. Why does the standard even require them? The following excerpt from ASC 842-20 offers a quick insight into the core objective of its disclosure requirements:
50-1 The objective of the disclosure requirements is to enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.
Disclosure requirements under ASC 842 are intended to offer the financial statement users a better understanding of the entity’s leasing activities. Particularly, a better understanding of the amount, timing, and uncertainty of lease cash flows.
This will then enable better assessment of the lease position of the Company and ultimately, help better and more informed decision-making by the users of financial statements.
The standard doesn’t stop here. The next half of the same paragraph (reproduced below) briefly outlines how this objective is to be met.
To achieve that objective, a lessee shall disclose qualitative and quantitative information about all of the following:
b. The significant judgments made in applying the requirements in this Topic to those leases
c. The amounts recognized in the financial statements relating to those leases
Let us now delve into the further details of the disclosure requirements of this standard to better learn what the standard requires.
Paragraph 50-1 above clearly demonstrates that the disclosures required by ASC-842 can be broken down into two broad categories:
Quantitative Disclosures
The main purpose of quantitative disclosures is to supplement the amounts recorded in the financial statements so that the users of financial statements can better understand the leasing activities of the Company.
We'll cover each required quantitative disclosures in detail below.
Qualitative Disclosures
Qualitative disclosures will take a narrative form and provide general information about the leasing position of a Company.
ASC 842 lays down an extensive list of qualitative disclosures that must be provided by the lessee. Starting from a general description of the leasing activities of the Company to the basis and terms of the leases, the significant policies adopted by the Company in respect of leases, and so on.
Where do you get these disclosures? Most of this information would be readily available in a Company’s lease agreements that you’d have to sift to know the disclosable highlights of your lease arrangement. Additionally, you’d have to revert to an entity’s accounting policies to complete the remaining disclosures.
Materiality of Disclosures
Para 20-50-2 of ASC 842 states that:
A lessee shall consider the level of detail necessary to satisfy the disclosure objective and how much emphasis to place on each of the various requirements. A lessee shall aggregate or disaggregate disclosures so that useful information is not obscured by including a large amount of insignificant detail or by aggregating items that have different characteristics.
The disclosure requirements of ASC 842 are much more complex and comprehensive than that of ASC 840 and meeting them all can be a significant challenge. Particularly, the fact that new disclosure requirements are extensive and open-ended but, more is not necessarily better.
Entities now need to consider the materiality of their disclosures much more than before. Disclosing immaterial information will be a waste of time for companies and users of financial statements. And over-aggregation runs the chance of obscuring the disclosures that matter.
What is the appropriate level of aggregation / disaggregation? The answer to this question will be unique for every entity based on its set of circumstances.
Some examples are:
→ If an entity leases two broad types of assets, say equipment and machinery, it might be appropriate to disaggregate disclosures at the "class of asset” level.
→ If an entity leases for 5-10 years and 10 or more years, it may disaggregate its leases based on the “lease term”.
→ An entity that has significant variable terms for some leases and fixed lease payments for others, it may be appropriate to disaggregate them on the basis of lease payment terms.
Let’s begin with what’s more extensive and complex – the quantitative disclosure requirements of ASC 842 for lessees.
The standard requires for each period presented in the financial statements, a lessee shall disclose the following amounts relating to a lessee’s total lease cost, which includes both amounts recognized in profit or loss during the period and any amounts capitalized as part of the cost of another asset by other Topics, and the cash flows arising from lease transactions:
| Item | Disclosure |
|---|---|
| (a) | Finance lease cost, segregated between the amortization of the right-of-use assets and interest on the lease liabilities |
| (b) | Operating lease cost |
| (c) | Short-term lease cost, excluding expenses relating to leases with a lease term of one month or less |
| (d) | Variable lease cost |
| (e) | Sublease income, disclosed on a gross basis, separate from the finance or operating lease expense |
| (f) | Net gain or loss recognized from sale and leaseback transactions |
| (g) | Amounts segregated between those for finance and operating leases for the following items: |