Lease Standard Education Series for Nonprofits – Practical Expedients and Policy Elections

• July 26, 2022
• Robert Zuengler

When the lease standard was originally issued, a modified retrospective approach was the required adoption method. This treatment required entities to apply the provisions of the standard to the beginning of the earliest comparative period presented. For example, if 12/31/2022 financial statements are presented with comparative 12/31/2021 financial statements, the standard would be applied for both years. The Financial Accounting Standards Board (FASB) received feedback and provided relief for the adoption and method and other practical expedients to ease certain complexities.

Practical Expedients:

Alternative for the Adoption Method

A practical expedient for the adoption method is a beginning of the period adoption which allows an entity to apply the provisions of this standard to the beginning of the period of adoption, through a cumulative effect adjustment. If comparative statements are presented for 12/31/2022 and 12/31/2021, the lease standard only affects the 2022 financial statement presentation. An entity can choose whether to implement the lease standard using the modified retrospective approach or the beginning of the period approach.

**The approach used for implementation is part of the disclosure for the adoption of ASC 842.

Package of Three Practical Expedients

The lease standard allows an entity to adopt a package of practical expedients in the year of implementation to reduce cost and ease the transition process. These practical expedients must be elected as a package and applied consistently to all leases that commenced before the effective date of the standard.

1. An entity need not reassess whether any expired or existing contracts are or contain leases.
2. An entity need not reassess the lease classification for any expired or existing leases (all existing leases that were classified as operating leases in accordance with ASC 840 will be classified as operating leases, and all existing leases that were classified as capital leases in accordance with ASC 840 will be classified as finance leases).
3. An entity need not reassess initial direct costs for any existing leases.

**A disclosure is required to address if the entity has elected to adopt or not adopt the package of practical expedients available in the year of adoption.

Hindsight Practical Expedient

An additional practice expedient that can be elected, which must also be applied consistently by an entity to all its leases, is to use hindsight in determining the lease term and in assessing impairment of the entity’s right of-use assets (ROU). This practical expedient may be elected separately or in conjunction with the package of three practical expedients.

**There is also a requirement for a disclosure if the entity has elected to adopt or not adopt the use of the hindsight practical expedient.

Portfolio Approach

A lessee or lessor has the option to apply the guidance in ASC 842 to a portfolio of leases with similar characteristics, such as size and composition, if the entity reasonably expects that the application of the lease model to the portfolio will not differ materially from the application to the individual leases in that portfolio.

**A disclosure is necessary to indicate if the entity has applied or not applied the portfolio approach in identifying its population of leases and in applying its incremental borrowing rate in certain relevant cases.

Separating Lease Components from Nonlease Components Practical Expedient

Lessees may make an accounting policy election by class of underlying asset not to separate lease components from nonlease components. If an entity makes that accounting policy election, it is required to account for the nonlease components together with the related lease components as a single lease component.

**A disclosure is needed stating if the entity will or will not make the accounting policy election not to separate lease components from nonlease components.

Policy Elections:

Short Term Leases Accounting Policy Election

ASC 842 defines a short-term lease as a lease that, at the commencement date, has a lease term of 12 months or less and does not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise. A lessee may make an accounting policy election to not apply the recognition requirements of ASC 842 to short-term leases. Instead, a lessee may recognize the lease payments in profit or loss on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred. The policy election for short-term leases must be made by class of underlying asset to which the right of use asset relates.

**A disclosure is needed to indicate if the entity will or will not make the accounting policy election for short-term leases for existing and future short-term leases for all classes of underlying assets.

Other-Lease Capitalization Threshold

ASC 842 does not contain a materiality threshold for recognition of a lease, however, the background information of ASU 2016-02, provides some guidance as to which lease assets and liabilities may not need to be recognized. “The Board observed that, in addition to accounting for some leases at a portfolio level, entities will likely be able to adopt reasonable capitalization thresholds below which lease assets and lease liabilities are not recognized, which should reduce costs of applying the guidance.”  An entity is not required to apply GAAP to immaterial items, so materiality is always a consideration in the preparation of financial statements. A practice such as this might be consistent with a capitalization threshold for property and equipment.

This content was created by CLA’s Ann-Marie WalshLaRocca, Nonprofit Director.

How CLA Can Help?

The new lease standard is here. Be proactive to understand its impact on your nonprofit. CLA has the lease resources to help assess its impacts beyond general accounting and financial reporting, and walk you through readiness assessment, software selection and analysis, and implementation.

A turnkey lease accounting option can include: 

• Assistance to identify and analyze leases that are subject to the standard
• Delivery of leased asset schedules, journal entries, and comprehensive footnote disclosures
• Updated and revised information at future interim or annual periods based on your needs

Lease Education Series

Stay tuned! In our next post we are taking a dive deeper into this new standard, looking at our first example – a basic copier lease.

In case you missed or would like to recall upon any prior content, below is a running list of the educational series:

Series Introduction

Lease Standard Basics

Discount Rates

Lease Identification and Lease Term

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