Lease Standard Education Blog Series – Financial Statement Presentation and Footnote Examples
As we continue with our nonprofit blog series on leases, let’s next look at the financial statement presentation and related footnotes.
Statement of Financial Position
FASB ASC 842 requires lessees to present right-of-use (ROU) assets from finance leases separately from ROU assets from operating leases and other assets, either on the face of the statement of financial position or in the notes to the financial statements. Separate presentation is also required for lease liabilities. The following are common financial statement line items on the Statement of Financial Position:
- Finance lease ROU asset
- Operating lease ROU asset
- Finance lease liability
- Operating lease liability
Another option is to include the ROU asset as a subcategory within a larger Statement of Financial Position classification, such as property, plant and equipment, and long-term debt. The line items would be disclosed in the footnotes.
Statement of Activities
The following information is included within the Statement of Activities:
- Finance Leases – The amount of interest expense on the lease liability and the amortization of ROU asset are presented.
- Operating Leases – The amount of lease expense is shown in the lessee’s income from continuing operations.
- Variable lease costs are not specifically addressed in ASC 842. Variable lease payments can be recognized in income from continuing operations. It would not be incorrect to report variable lease costs as amortization or lease expense, but it is not typical. There should be disclosure of how variable lease costs are presented.
Statement of Cash Flows
The following information is included within the Statement of Cash Flow:
- Within operating activities:
- Interest on the lease liability from finance leases
- Payments from operating leases
- Variable lease payments and short-term lease payments are not included in the lease liability
- Within financing activities:
- Repayments of the principal portion of the lease liability
- For operating leases, repayment of liability is a component of net income and is classified in operating activities but does not require a separate line item.
- Amortization expense of the ROU asset is a noncash expense, which is included as an adjustment from net income to cash provided by operating activity section.
Footnotes
An important part of ASC 842 are the new and expanded footnotes. It is important to do a full reading of ASC 842 to understand the changes to the disclosures related to footnotes. Below we have outlined some of the information that should be included when drafting your new lease footnotes with sample language.
Adoption of New Standard and Method of Adoption: ASC 842 requires implementation using either the modified retrospective approach or an optional alternative approach where comparative periods presented are not recast when transitioning.
Adoption of New Accounting Standards:
In February 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-02, Leases (Topic 842). This new standard increases transparency and comparability among organizations by requiring the recognition of right-of-use (ROU) assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.
The Organization adopted the requirements of the guidance effective January 1, 2022, and has elected to apply the provisions of this standard to the beginning of the earliest comparative period presented.
OR
The Organization adopted the requirements of the guidance effective January 1, 2022, and has elected to apply the provisions of this standard to the beginning of the period of adoption
Practical Expedients and Significant Elections: The standard provides a number of practical expedients and other elections that can be adopted in the year of implementation. These would be included with the adoption footnote above.
- The package of three practical expedients that an organization may elect to adopt in the year of implementation to ease the transition process in the first year include the fact that an organization need not reassess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, and (3) initial direct costs for any existing leases. These must be elected as a package.
The Organization has elected OR has not elected to adopt the package of practical expedients available in the year of adoption. The Organization has elected OR has not elected to adopt the available practical expedient to use hindsight in determining the lease term and in assessing impairment of the Organization’s ROU assets.
- Separating Lease Components from Nonlease Components Practical Expedient – This is a practical expedient for lessees as it relates to separating lease components from nonlease components. Lessees may make an accounting policy election by class of underlying asset not to separate lease components from nonlease components. If an organization 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.
The Organization [will -OR- will not] make the accounting policy election not to separate lease components from nonlease components.
- Short Term Leases Accounting Policy Election – A short-term lease is defined 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 (ASC 842 glossary). A lessee may elect as an accounting policy not to 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 accounting policy election for short-term leases shall be made by class of underlying asset to which the right of use relates.
The Organization [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.
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 the standard’s impacts beyond general accounting and financial reporting. We can help 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 final post, we will provide tips and recommendations to help you foster a smooth implementation and year-end audit engagement.
In case you missed or would like to reread any previous blog posts, see the list below of the full series:
Lease Identification and Lease Term
Practical Expedients and Policy Elections
Building Lease Example, No Change in Lease Classification
Building Lease Example, Change in Lease Classification
This content was created by CLA’s Ann-Marie WalshLaRocca, Nonprofit Director.
Comments are closed.