By LeaseCrunch® on September 23, 2022 at 9:50 AM
ASC 842 disclosure requirements are an important part of complying with the new lease standard. However, making sure you have all the appropriate information where you need it can be a herculean task. In this blog we go over ASC 842 compliance and how ASC 842 disclosure requirements are an important part of completing a compliant financial statement.
Before we cover any ground with disclosures, let’s refresh on what ASC 842 compliance is.
What is ASC 842 Compliance?
Compliance with ASC 842 at its most basic level means that an organization has properly recognized both their finance and operating leases on their balance sheets based on FASB’s new definition of a lease—the idea that a lease is anything with a “right-of-use” asset.
In addition to this recognition, an organization also must have expanded disclosure requirements in order to meet the compliance standards of ASC 842.
Who Must Comply with ASC 842?
In order to remain in compliance with Generally Accepted Accounting Principles (GAAP), all public and private companies and organizations as well as nonprofits in the US must comply with the accounting standards stated in ASC 842.
What are Disclosure Requirements?
Now that we’ve covered ASC 842 compliance, what exactly are disclosure requirements, and why are they an important part of ASC 842 implementation?
Disclosure requirements are requirements created with the intent of providing readers of financial statements with more thorough insights into the lease activities of a company (which is the ultimate goal of FASB as well). Generally, the term “disclosures” refers to footnote disclosures.
Footnote disclosures are particularly helpful for financial statement users looking to assess the amount and timing of cash flows that arise from leases. Of these disclosures, there are two types: Qualitative and quantitative.
What are the Required Disclosures in the Financial Statements of the Lessee?
For the lessee, both qualitative and quantitative ASC 842 disclosure requirements are required to be disclosed. Below, we will walk through each of these.
Quantitative ASC 842 disclosure requirements are all calculations-based. They are relatively straightforward in that when an organization needs one, they know exactly how to calculate it if they know the formula.
Lease expense includes the different types of finance and operating lease expenses incurred by an organization and included on the income statement. It is also necessary to account for:
- Short-term leases
- Variable lease expenses
- Sublease income
Under ASC 842, undiscounted cash flows are required to be disclosed, with the present value discount included. This allows the schedule to match the total lease liabilities on the balance sheet.
Other Lease-Related Information
Some of the other lease-related information required to be disclosed in ASC 842 footnotes are:
- Sale-leaseback - a lessee is required to disclose their net-gain or loss from these types of transactions
- Cash flows - for both finance and operating leases, a lessee must disclose the cash paid to reduce lease liability (for operating leases, this is the total cash paid, and for finance leases, this includes the interest paid, disclosed broken out from principal payments)
- New ROU assets - these must be broken out by finance and operating leases, with the remaining lease term calculated on a weighted average for all leases at the end of the reporting period
- Weighted average remaining lease term - this must be broken out by finance and operating leases, with the remaining lease term calculated on a weighted average for all leases at the end of the reporting period
- Weighted average discount rate - this must also be broken out by finance and operating leases. It is the weighted average of all the discount rates of leases on the books for a particular year
Quantitative disclosures are straightforward in a way that qualitative disclosures are not. Whereas quantitative disclosures are numbers-based, qualitative are more descriptive, providing context in the form of explanation for the numbers on a financial statement.
According to the new standard, qualitative disclosures should walk the line between summarizing information and giving details about an aspect of a lease.
An existing lease qualitative disclosure should provide a general description of an organization’s existing leases, including the basis, terms, and conditions on which variable lease payments are determined; the existence and terms and conditions of options to extend or terminate lease; the existence and terms and conditions of residual value guarantees; and any restrictions or covenants imposed by leases.
If an entity has a lease that has not yet begun but will contribute ROU assets and liabilities on the books, this lease needs to be disclosed, as well as any involvement an entity has with the construction or design of an underlying asset.
This includes providing any information about any significant assumptions and judgments made in applying the new standard to an entity’s financial statements.
Are These Required to Be Disclosed in the Financial Statements as a Lease Liability?
All of these disclosures must be disclosed on the financial statements of organizations that follow FASB lease accounting standards. Whether or not these disclosures are lease liabilities or contribute to a lease liability depends on the specific disclosure requirement.
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