Disclosures required for an operating lease focus primarily on the income statement and the commitments to make future payments under the lease. Example 1 of ASC 840-10-55-40 includes an illustration of a lessee’s application of the disclosure requirements for an operating lease.

Inception of an operating lease is the date the terms are agreed to by the parties. Lease commencement is the date the lessee controls the use of the property.

The specific disclosure requirements of ASC 840 apply upon lease commencement. Prior to this date, the lessee should disclose its lease commitment in a manner similar to how it discloses commitments to purchase or construct properties that it will own in accordance with ASC 450, Commitments. See FSP 23 for discussion of commitments and contingencies.

As discussed in ASC 840-20-50-1, a lessee in an operating lease is required to disclose rental expense for each period for which an income statement is presented, with separate disclosure for minimum rentals, contingent rentals, and sublease rentals.

This disclosure may exclude rental payments under leases with terms of a month or less that were not renewed. For example, assume a construction company rents heavy equipment on a day-to-day basis in an arrangement that may be cancelled by either party at any time. The lessee may exclude those rents from its disclosure of rental expense even if those expenses are significant.

As discussed in ASC 840-20-50-2(a), for operating leases that have initial or remaining noncancelable lease terms that are greater than one year, lessees should disclose the minimum rental payments for each of the next five years, and a sum for all years thereafter, followed by a total.

When preparing the disclosure of future minimum rental payments, a question may arise as to whether the lessee's disclosure should be based on (1) the future cash payments it is obligated to make, or (2) the expense it will recognize in the income statement on a straight-line basis. These amounts often differ, since many leases include non-level rents. While both approaches are acceptable, we believe the requirement was intended to reflect future cash payments. As a best practice, a lessee should clarify that the disclosure is based on contractually-required cash payments while expense recognition is on a straight-line basis.

The lessee may exclude lease payments that the lessee can avoid at its option. For example, the lessee may exclude rents due in a future extension period even if it is considered part of the lease term. If the lessee elects to exclude those rents, it should consider disclosing that fact. This election is only available to lessees that base their disclosure on future cash payments.

For foreign currency transactions, lessees should translate the amount of future minimum rental payments for purposes of the disclosure at the current exchange rate at the balance sheet date.

As discussed in ASC 840-20-50-2(b), a lessee should also disclose the total minimum rentals it is entitled to receive under noncancelable subleases, if any, as of the date of the latest balance sheet presented.

When a lessee stops using a leased asset altogether during the lease term, the transaction may be subject to the accounting and disclosure requirements of ASC 420, Exit or Disposal Cost Obligations. See FSP 11 for discussion of disclosures related to restructuring activities.

Example 1 of ASC 840-10-55-40 includes an illustration of lessee disclosures under capital leases.

As with operating leases, prior to the commencement date, leases are not subject to the specific disclosure requirements of ASC 840, but a reporting entity instead should disclose its lease commitment similar to a commitment to purchase or construct properties that it will own. See FSP 23 for discussion of commitments and contingencies.

Regardless of whether the capital lease information is presented on the balance sheet or in the footnotes, lessees should present assets recorded under capital leases by major class according to their nature or function (e.g., manufacturing facilities, retail facilities, or transportation equipment), along with the associated accumulated amortization. A lessee may combine this information with other comparable disclosures for owned assets.

In accordance with ASC 840-30-50-1(b), a lessee should disclose the future minimum lease payments for each of the next five years, and a sum for all years thereafter, followed by a total. A lessee should subtract amounts representing executory costs included in the rent payment (e.g., maintenance, property taxes and property insurance) from this total to disclose the net minimum lease payments. Further, a lessee should subtract any imputed interest to disclose the present value of net minimum lease payments.

For capital leases, a lessee should also disclose the total minimum rentals it is entitled to receive under noncancelable subleases, if any, as of the date of the latest balance sheet presented, as discussed in ASC 840-30-50(c).

For capital leases, ASC 840-30-50(d), requires a lessee to disclose contingent rental expense for each period for which an income statement is presented, and disclose where the contingent rent was presented in the income statement.

As discussed in ASC 840-30-45-3, a lessee in a capital lease often presents interest expense with other interest in the income statement.

ASC 840-30-45-3 allows a lessee in a capital lease to either present the amortization of assets under capital lease separately or disclose the amount in the footnotes.

Because of the strict accounting guidance applicable to the sale and leaseback of real estate (including integral equipment), these transactions frequently do not qualify for sales recognition. In these “failed” sale-leaseback transactions, the seller-lessee continues to reflect the asset it “sold” on its balance sheet as if it still legally owns the asset. The lessee would typically reflect the sale proceeds received from the buyer-lessor as a financing on its balance sheet, even though the lease might otherwise have been classified as an operating lease had the transaction qualified for sale treatment.

In a failed sale-leaseback transaction, the seller-lessee should provide disclosures similar to any other financing obligation (see FSP 11 for discussion of disclosures related to various liabilities). Additionally, as discussed in ASC 840-40-50-1, the seller-lessee should describe the terms of the transaction, including future commitments and obligations that arise from the transaction and the circumstances that result in the seller-lessee’s continuing involvement with the “sold” asset. For example, if a seller-lessee did not account for a sale leaseback transaction as a sale because it has an option to repurchase the asset at its fair value at a future date, the lessee should disclose that provision as a form of continuing involvement with the asset.

In addition to the disclosures applicable for financing obligations discussed in FSP 12.12, under ASC 840-40-50-2, the seller-lessee in a failed sale-leaseback should continue to disclose the five-year data described in FSP 14.3.2.2A for operating leases. That is, the lessee should disclose the lease payments and any lease receipts on non-cancelable subleases associated with the failed sale-leaseback for each of the next five years and all periods thereafter, with a total.

The amounts in the financing and leasing disclosures will differ from how the lessee accounts for these cash payments. In a failed sale-leaseback transaction accounted for as a financing, for example, the lessee will recognize its cash payments as interest and principal payments, whereas the leasing disclosures focus on the gross cash flows.