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.
Scope of disclosures
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
. 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.
Minimum lease payments
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.