By Ane Ohm on July 9, 2019 at 8:00 AM
The objective of the footnote disclosure is to enable users of financial statements to assess the amount and timing of cash flows arising from leases.
Under the previous lease standard, ASC 840, these disclosures were primarily limited to a maturity schedule that showed each of the next five years’ committed payments, with further payments lumped together. Further, there was no discount rate applied, it was just the payments themselves. For many organizations, it meant that lease disclosures were fairly easy to handle with a spreadsheet.
The new lease standard increases the scope and complexity of the financial statement footnote disclosure with additional requirements for both quantitative and qualitative disclosures. Handling these disclosures with a spreadsheet has become far more difficult than before.
Quantitative footnote disclosures can be broken down into three categories: lease expense, maturity analysis, and other lease-related information.
This category summarizes all of the different types of lease expenses that are included on the income statement. For finance leases, this needs to be further broken down by the amortization of the right of use (ROU) asset, as well as the interest incurred for the lease liability. For an operating lease, this is the straight-line lease expense recognized in the current year.
In addition to disclosing the expenses for finance and operating leases, you need to disclose specifics for the following lease-related expenses:
- Short-Term Leases. Leases with a lease term shorter than 12 months and for which you have elected the practical expedient to simply include the lease payments on the income statement and not create a related ROU asset and lease liability.
- Variable Lease Expenses. Lease expenses that vary entirely on a performance metric like sales, or an index or rate such as the Consumer Price Index, or other variation that is not known at lease inception.
- Note: Minimum lease payments are known and therefore are included in the finance or operating lease expense above. Only payments unknown at lease inception are excluded from the ROU asset and lease liability and recorded solely as a variable lease expense.
- Sublease Income. Income recorded by subleasing a leased asset to another third party. In these situations, you become a lessor and this income needs to comply with ASC 842 lessor accounting requirements.
The new lease standard maturity analysis is similar to the ASC 840 maturity analysis, with a couple of exceptions. Under ASC 842, the undiscounted cash flows continue to be disclosed, similar to ASC 840. For ASC 842, the present value discount must also be included, which allows the schedule to match the total lease liabilities on the balance sheet.
- Sale-Leaseback. If any sale-leaseback transactions have occurred during the year, you have to disclose the net gain or loss for those transactions.
- Cash Flows. For both finance and operating leases, you have to disclose the cash paid to reduce the lease liability. For operating leases, you disclose the total cash paid. Finance leases must be disclosed separately, with interest paid broken out from principal payments.
- New ROU Assets. Broken out by finance versus operating leases, you need to disclose new ROU assets recognized on the books during the year.
While all of the quantitative footnote disclosures can take a good amount of time to calculate properly, it’s the next two disclosures that are the most complicated footnote calculations. This is often what puts people over the edge to using software for compliance with the new lease standard.
- Weighted Average Remaining Lease Term. Broken out by finance and operating leases, this is the remaining lease term, calculated on a weighted average, for all leases as of the end of the reporting period.
- Weighted Average Discount Rate. Again broken out between finance and operating leases, this is the weighted average of all the discount rates of leases on the books for that year.
Overall, the qualitative disclosures require a discussion around the nature of the organization’s lease arrangements. You do need to use your judgment about how much detail to include. The new lease standard explicitly states that the qualitative disclosures shouldn’t be either too summarized or too detailed – either extreme could serve to distort the usefulness of the financial statements.
With that said, you need to disclose all of the following:
- Existing Leases. Information about the nature of your leases, including the following (with any subleases specifically identified):
- A general description of those leases.
- The basis and terms and conditions on which variable lease payments are determined.
- The existence and terms and conditions of options to extend or terminate the lease, including a narrative disclosure about the options that are recognized as part of its right-of-use assets and lease liabilities and those that are not.
- The existence and terms and conditions of residual value guarantees.
- Restrictions or covenants imposed by leases; for example, those relating to dividends or incurring additional financial obligations.
- Future Leases. If you have leases that have not yet begun, but will add significant ROU assets and lease liabilities on the books, they need to be disclosed. Additionally, you need to provide information about any involvement with the construction or design of the underlying asset.
- Judgments. Provide information about any significant assumptions and judgments made in applying the new lease standard, which may include the following:
- How you determined whether contracts contained a lease.
- How you allocated any lease and nonlease payments.
- How you determined your lease discount rates.
Footnote disclosures under the new lease standard can be complicated, but the right tool can vastly simplify the process. LeaseCrunch is a software solution specifically designed to streamline implementation of the new standard, including automating initial journal entries and quantitative footnote disclosures. Learn more here.