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We believe that presentation as either lease expense or interest expense may be appropriate, depending on the nature of the lease. While the majority of our leases are gross leases, we also have a number of leases in which we make separate payments to the lessor based on the lessor’s property and casualty insurance costs and the property taxes assessed on the property, as well as a portion of the common area maintenance associated with the property. ASU 2016-02 does allow for multiple practical expedients, which may reduce the burden of transition and should be explored by all affected lessees to ensure the most efficient and effective transition approach is utilized based on the size, structure and complexity of each lessee’s business. Under its core principle, a lessee will recognize right-of-use (“ROU”) assets and related lease liabilities on the balance sheet for all arrangements with terms longer than 12 months. We have not presented a statement of financial position, but have assumed that Susie’s has presented the following captions: We have also not presented a statement of comprehensive income, but have assumed that Susie’s has presented Cost of sales, SG&A expense, Depreciation and amortization expense, and Interest expense. In addition, we have elected the short-term lease practical expedient related to leases of various equipment used in our retail locations. 1. adoption deadline for the new guidance in Accounting Standards Update (ASU) 2016-02, Leases (Topic 842), is drawing closer. Specifically, a number of our leases in certain markets require rent payments that are calculated as a percentage of sales in that location. During his career, Mr. Mishler has managed finance and accounting in more than 30 countries and has led due diligence, negotiations, structuring, and integration of more than 25 acquisitions.Mr. How ASU 2016-18 Will Change Your Cash Flow Statement. Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases. The ASU will take effect for public companies for fiscal years beginning after December 15, 2017. Although certain of the retail locations are currently under construction, we do not control the building during construction, and are thus not deemed to be the owner during construction. Filed Under: Leases, Presentation. The ASU requires both qualitative and quantitative disclosures about an entity's leasing arrangements. 2016-02, Leases (Topic 842).The objective of this ASU is to increase transparency and comparability in financial reporting by requiring balance sheet recognition of leases and note disclosure of … In total, we estimate about 93% of companies provide this level of disclosure for their operating leases in 10-Ks and 50% in 10-Qs. John has also served as the 2002/2003 President of the American Accounting Association’s Mid-Atlantic Region.John and his wife Marge live in Medford, New Jersey. SmartPros is an international educational and training company specializing in accounting, finance and ethics educational programs. What’s new? DISCLOSURES REQUIRED BY ASU 2016-02 LEASES (ASC TOPIC 842) The FASB issued this update to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Course Code Lessor Presentation & Disclosure Requirements. This article provides an example of implementing ASU 2016-14 that focused on the following concepts: Liquidity and availability of resources; Financial performance; Cash flow reporting. ASU 2016-02, Leases, is effective for fiscal years beginning after Dec. 15, 2018, including interim periods within those fiscal years, for the following entities: A public business entity A not-for-profit entity that has issued, or a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market During deliberations for the standard, many users indicated that the existing disclosure requirements did not provide sufficient information to understand an entity’s leasing activities. Lessor Presentation & Disclosure Requirements. Similarly, lease liabilities for finance leases are required to be presented separately from lease liabilities from operating leases and from other liabilities. According to Center for Audit Quality Alert 2017-03, SAB Topic 11.M – A Focus on Disclosures for New Accounting Standards, the SEC staff expects that SAB 74 disclosures will become more robust and quantitative as the new accounting standard’s effective date approaches. ASU No. [7] The disclosures regarding lease income as discussed in ASC 842-30-50-5 are required for each annual, Sign up to receive our email newsletter to keep up with the latest from Smith & Howard. Non-cash investing and financing activities: Finance lease right-of-use assets in the same line item as operating lease right-of-use assets, Finance lease liabilities in the same line item as operating lease liabilities, Present lease assets separately from other assets in the statement of financial position, Classify lease assets as current or noncurrent consistent with the way similar assets are classified, Present the underlying assets subject to an operating lease in accordance with other accounting standards, Present revenue and cost of goods sold relating to leasing activities in separate line items if lessor uses leases as an alternative means of realizing value from goods it would otherwise sell, Present profit or loss in a single line item if lessor uses lease for purposes of providing finance, The basis and terms and conditions on which variable lease payments are determined. John retired as President of Loscalzo Associates on January 1, 2014.John’s prior practice experience includes audit, tax, consulting, office management, and human resource responsibilities with Deloitte LLP, Richard Eisner & Company LLP, and Ernst & Young LLP. Example. ... (for example, maintenance services). The new standard does not provide specific guidance on the presentation of variable lease payments (for either finance or operating leases). As such, the following types of SAB 74 disclosures are expected in a registrant’s financial statements in the periods before new accounting standards are effective: Some SEC registrants have questioned whether they must recast all periods reflected in the 5 year Summary of Selected Financial Data in accordance with the new leasing standard? This is the first major overhaul of lease guidance since 1973 and implementation ASU 2016-02 and SEC Staff Accounting Bulletin 74. Entities must make appropriate disclosures for each annual reporting period for which a statement of comprehensive income (statement of activities) is presented and in each year-end statement of financial position. Paragraph BC271 in the basis of conclusions for ASU 2016-02 indicates that amount recognized in the income statement should be presented within income from continuing operations. For finance leases, a lessee should present the interest expense on the lease liability and amortization of the ROU asset in a manner consistent with how the lessee reports other interest expense and depreciation or amortization expense in the income statement. For example, an entity that elects to adopt the new standard as of the effective date (i.e., without restating prior comparative periods), the four prior years in the selected financial data table would not be adjusted. The Guidance. Effective on January 1, 2019, calendar-year public business entities adopted the Financial Accounting Standard Board ( FASB)’s Accounting Standards Update (ASU) 2016-02, Leases (Topic 842), including numerous related amendments. The existence and terms and conditions of options to extend or terminate the lease. Lease payment is $50,000 paid at the end of each year 3. Effective on January 1, 2019, calendar-year public business entities adopted the Financial Accounting Standard Board ( FASB)’s Accounting Standards Update (ASU) 2016-02, Leases (Topic 842), including numerous related amendments. The new standard does not provide specific guidance on the presentation of variable lease payments received for direct financing or sales type leases. However, the related lease liabilities are subject to current and long-term presentation requirements in a classified balance sheet, consistent with the way other financial liabilities are presented. The public entity. The disclosures provide users of The pattern of expense recognition in the income statement will depend on a lease’s classification. Disclosure requirements for defined benefit plans The Board discussed the amendments in the proposed ASU, Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans, and made several tentative decisions related to removing, retaining, or modifying existing disclosure requirements and to adding new disclosure requirements. In addition, ROU assets are presented as noncurrent in the lessee’s balance sheet, consistent with how other amortizing assets such as PP&E are presented. Payments of principal should be presented as financing activities, while payments of interest would typically result in operating cash flow presentation. Registrants are only required to adjust the periods in the financial data table that correspond to the periods adjusted in the registrant’s financial statements. As noted previously, the objective of the disclosure requirements in the new leasing standard is to enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. Beginning with all fiscal year ends that begin after December 15, 2018 (calendar year 2019), the statement of cash flows must account for a recent change in Topic 230 regarding the disclosure of entities’ cash and cash equivalents. : 271 17th Street, NW [4] Unlike other recent standards, ASC 842 does not distinguish between public entities and all other entities. ASU 2016-02, which is effective for publicly traded companies after Dec. 15, 2018, states that all leases, whether classified as operating or capital leases (called “finance leases” under the new standard), create a right-of-use asset and a liability that should appear on the lessee’s balance sheet. As of December 31, 20×9 and 20×8, right-of-use assets and lease liabilities related to finance leases were as follows: During the years ended December 31, 20×9, 20×8 and 20×7, we had the following cash and non-cash activities associated with our leases: The future payments due under operating and finance leases as of December 31, 20×9 is as follows: As of December 31, 20×9 and 20×8, the weighted-average remaining lease term for all operating leases is 3.4 years and 3.5 years, respectively, while the weighted-average remaining lease term for all finance leases is 4.9 years and 5.6 years, respectively. Income arising from leases should be presented separately in the income statement or in the footnotes. It’s been over a year since the FASB issued ASU 2016-02,1 its new standard on accounting for leases ... and presentation and disclosure. In January of 2016, the FASB issued Accounting Standards Updates 2016-01, Financial Instruments – Overall, which requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. Applicability. Information about significant assumptions and judgments made, including: For each period presented, disclose amounts related to a lessee’s total lease cost (including both amounts recognized in income and capitalized) and the cash flows arising from lease transactions. John M. Fleming, CPA, MBA, is currently the Director, Content Development for SmartPros LTD, a division of Kaplan Professional Education. 1 adoption deadline for the new guidance in Accounting Standards Update (ASU) 2016-02, Leases (Topic 842), is drawing closer. Companies will be required to provide the disclosures required by Instruction 2 to S-K Item 301 regarding comparability of the data presented. Generally, we do not consider any additional renewal periods to be reasonably certain of being exercised, as comparable locations could generally be identified within the same trade areas for comparable lease rates. ASU 2015-11 requires that entities measure inventory at the lower of cost or net realizable value (LCNRV), provided they don’t use the last-in-last-out method (LIFO) or the retail inventory method. FASB issues its final standard ASU 2016-02, Leases (February 25) Understanding the journey 2005 2006 2009 2010 2013 2016 After more than 10 years in the making… Let’s … Mark D. Mishler, CPA, CMA is Senior Vice President, Chief Financial Officer, Treasurer, and Secretary with Breeze-Eastern (NYSE:BZC), a global 'rospace manufacturer. Payments related to operating leases, leases to which the lessee has applied the practical expedient for short term leases, and any variable lease payments for either operating or finance leases should all be classified as operating cash outflows (unless the payment represents a cost of bringing another asset to the condition and location necessary for its intended use, in which case it should be classified within investing activities). However, as a guiding principle, the basis for conclusions indicates “if leasing is a significant part of an entity’s business activities, the disclosures would be more comprehensive than for an entity whose leasing activities are less significant….”[2] For example, although the new standard does not provide specific quantitative or qualitative disaggregation requirements such as those required under ASC 606, for entities for which leasing is a significant portion of their business, such disaggregation might be appropriate. FASB Accounting Standards Codification (ASC) 842-20-50-1 and 842-30-50-1 provide that “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.” The standard further indicates that “a lessee [lessor] shall consider the level of detail necessary to satisfy the disclosure objective and how much emphasis to place on each of the various requirements. Note that ASU 2016-02 also discusses various other technical accounting and presentation issues, inclusive of lease modifications, lease reassessments, related party leases, sale-leaseback transactions and qualitative and quantitative disclosures required in the lessee’s financial statements, as well as lessor accounting. All of our retail leases include multiple optional renewal periods. 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