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9.9 Transition disclosure
Publication date: 31 Jan 2023
us Leases guide
Lessees and lessors should provide the transition disclosures required by ASC 250, Accounting Changes and Error Correction, except that the information described in ASC 250-10-50-1(b)(2) and ASC 250-10-50-3 is not required.
Additionally, if a reporting entity uses any of the transition practical expedients discussed in LG 9.3.1, it is required to disclose the use of such expedients.
Excerpt from ASC 250-10-50-1
An entity shall disclose all of the following in the fiscal period in which a change in accounting principle is made:
- The nature of and reason for the change in accounting principle, including an explanation of why the newly adopted accounting principle is preferable.
- The method of applying the change, including all of the following:
- A description of the prior-period information that has been retrospectively adjusted, if any.
- [Not required]
- The cumulative effect of the change on retained earnings or other components of equity or net assets in the statement of financial position as of the beginning of the earliest period presented.
- If retrospective application to all prior periods is impracticable, disclosure of the reasons therefore, and a description of the alternative method used to report the change (see paragraphs 250-10-45-5 through 45-7).
- If indirect effects of a change in accounting principle are recognized both of the following shall be disclosed:
- A description of the indirect effects of a change in accounting principle, including the amounts that have been recognized in the current period, and the related per-share amounts, if applicable
- Unless impracticable, the amount of the total recognized indirect effects of the accounting change and the related per-share amounts, if applicable, that are attributable to each prior period presented. Compliance with this disclosure requirement is practicable unless an entity cannot comply with it after making every reasonable effort to do so.
Financial statements of subsequent periods need not repeat the disclosures required by this paragraph. If a change in accounting principle has no material effect in the period of change but is reasonably certain to have a material effect in later periods, the disclosures required by (a) shall be provided whenever the financial statements of the period of change are presented.
9.9.1 Lessee’s transition disclosure for index or rate-based rent
There is diversity in practice in how lessees prepare their footnote disclosures under ASC 840 when rent payments in an operating lease depend on an index or rate. ASC 840 defines minimum lease payments as being based on the index or rate in effect at lease inception (unless there has been a modification to that lease, in which case the index or rate at the modification date should be used). Lessees are required to base straight-line rent expense accruals for operating leases on this definition.
Some lessees prepare their ASC 840 footnote disclosures consistent with the required recognition model, others update the inception date index or rate to reflect the current index or rate. For purposes of transitioning operating leases under ASC 840 to the new leases standard, a lessee should measure lease liabilities at the applicable date using the “remaining minimum rental payments,” as defined under the current leases guidance. Given the diversity in practice, the issue is whether the index or rate in rent payments should be the index or rate at inception date of the lease or updated to reflect the current index or rate.
In addressing the diversity in practice, we understand the SEC staff would allow lessees to use an index or rate for transitioning operating leases to ASC 842 that is consistent with the policy used for footnote disclosures under ASC 840. The SEC staff noted that a lessee may choose to change the policy it is currently using for ASC 840 operating lease footnote disclosures purposes for transitioning such leases to the new leases standard. However, this would be a change in accounting policy and the lessee would be required to apply ASC 250, Accounting Changes and Error Corrections, which would require a determination that the new policy is preferable. The SEC staff observed that it was reasonable to conclude that the use of a current index or rate better reflects the lease liability and would therefore be preferable.
As a result of the SEC staff’s views, for leases classified as operating leases under ASC 840, we believe a lessee may measure the opening lease liability under the new leases standard in the following manner at transition:
- If a lessee uses the current date index or rate in its ASC 840 operating lease financial statement disclosures, the lessee could either (a) use the current date index or rate; or (b) use the lease inception date index or rate consistent with how minimum rent payments are recognized.
- If a lessee uses the inception date index or rate in its ASC 840 operating lease financial statement disclosures, the lessee could either (a) use the current date index or rate but apply the change in accounting guidance in ASC 250; or (b) continue to use the lease inception date index or rate.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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