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PwC is pleased to offer our updated Leases. The FASB’s new standard on leases, ASC 842, is already effective for most public companies and will replace today’s leases guidance for other companies in 2021. This guide discusses lessee and lessor accounting under ASC 842. The first four chapters provide an introduction and guidance on determining whether an arrangement is (or contains) a lease and how to classify and account for lease and nonlease components. This guide also discusses the modification, remeasurement, and termination of a lease, sale and leaseback transactions, leveraged lease transactions, as well as other topics. Chapters 9 and 10 address the presentation and disclosure requirements as well as the effective date and transition.
This guide summarizes the applicable accounting literature, including relevant references to and excerpts from the FASB’s Accounting Standards Codification (the Codification). It also provides our insights and perspectives, interpretative and application guidance, illustrative examples, and discussion on emerging practice issues.
This guide should be used in combination with a thorough analysis of the relevant facts and circumstances, review of the authoritative accounting literature, and appropriate professional and technical advice.
References to US GAAP
Definitions, full paragraphs, and excerpts from the FASB’s Accounting Standards Codification are clearly labelled. In some instances, guidance was cited with minor editorial modification to flow in the context of the PwC Guide. The remaining text is PwC’s original content.
References to other PwC guidance
This guide provides general and specific references to chapters in other PwC guides to assist users in finding other relevant information. References to other guides are indicated by the applicable guide abbreviation followed by the specific section number. The other PwC guides referred to in this guide, including their abbreviations, are:
  • Business combinations and noncontrolling interests (BCG)
  • Bankruptcies and liquidations (BLG)
  • Consolidation and equity method of accounting guide (CG)
  • Financial statement presentation (FSP)
  • Financing transactions (FG)
  • Income taxes (TX)
  • Loans and investments (LI)
  • Revenue from contracts with customers (RR)
  • Stock-based compensation (SC)
  • Transfers and servicing of financial assets (TS)
Summary of significant changes
Following is a summary of the noteworthy revisions to the guide since it was last updated in November 2019. Additional updates may be made to keep pace with significant developments.
Revisions made in October 2020
LG 1, Introduction
  • Figure LG 1-1 and Figure LG 1-2 were updated to include information about ongoing standard setting with respect to FASB’s leases improvements project.
  • LG 1.5 was updated to include the deferred ASC 842 effective date for private entities and certain public not-for-profit entities. 
LG 2, Scope
  • LG 2.2 was updated to include interpretive guidance on the scope exclusion related to leases to explore for or use minerals, oil, natural gas, and similar nonregenerative resources.
  • LG 2.3.2.2 was updated to reflect interpretive guidance on how reporting entities should evaluate which party has the right to direct the use of an identified asset.
LG 3, Lease classification
  • Question LG 3-1 was updated to reflect interpretative guidance on how lessees and lessors should assess legally enforceable rights and allocate contract consideration in a related party lease.
  • Example LG 3-5 was added to illustrate how to determine a lease term for lease portfolios where a lessee can terminate a percentage of the individual leases early.
  • Question LG 3-16 was added to address how non-performance related default covenant payments are considered for lease classification purposes.
LG 4, Accounting for leases
  • Figure LG 4-1 was updated to clarify certain examples of costs included in and excluded from initial direct costs.
  • Question LG 4-1 was added to address the accounting for minimum annual guarantee payment arrangements.
  • Example LG 4-5 was updated to include the calculation for allocation of payment between lease and nonlease components.
  • LG 4.3.1.1 was updated to include information about ongoing standard setting with respect to FASB’s leases improvements project.
  • LG 4.3.3 was updated to include the accounting for uneven rents by a lessor in an operating lease.
  • Example LG 4-14 was added to address the timing of lease cost recognition in contract manufacturing arrangements.
LG 5, Modification and remeasurement of a lease
  • LG 5.1 was updated to include discussion on remeasurement when there is a bankruptcy filing or a modification under the reference rate reform.
  • Figure LG 5-1 was updated to clarify lessee accounting for a lease modification.
  • LG 5.3.1 was updated to include information about ongoing standard setting with respect to FASB’s leases improvements project.
  • Question LG 5-3 was added to discuss the accounting by a lessee for reimbursing the lessor for capital improvements.
  • Question LG 5-4 was added to discuss amortization of a right-of-use asset that has been impaired and subsequently modified or remeasured.
  • LG 5.5.1 was updated to include a more detailed discussion on accounting for partial terminations by a lessee. Information about ongoing standard setting with respect to FASB’s leases improvements project was also added.
  • Example LG 5-10 and Example LG 5-11 were added to illustrate the accounting by a lessee for certain partial termination and early termination scenarios.
  • Figure LG 5-3 was updated to clarify lessor accounting for a lease modification.
  • LG 5.6.2 was amended to clarify lessor accounting for a lease modification that is not accounted for as a separate contract.
  • LG 5.7 was added to discuss accounting for lease remeasurement by a lessor.
  • Question LG 5-9 was added to discuss the accounting by a lessor for reimbursement of capital improvements.
  • Question LG 5-6 was added to discuss the accounting by a lessor for a termination penalty paid by a lessee due to a modification of two leases between them with the immediate exit of one property by the lessee at the lease modification date.
LG 6, Sale and leaseback transactions
  • Example LG 6-3 was added to discuss whether sale and leaseback accounting is applicable when a lessee sells or transfers an option to purchase an asset to the lessor provided the lessor will exercise the option and lease the asset to the lessee.
  • Question LG 6-1 added to describe a lessee’s accounting for land when the lessee is the deemed owner of an asset under construction on the land.
  • Example LG 6-6 was added to illustrate a lessor’s accounting for derecognition of construction-in-progress when the lessee is the deemed owner during construction.
  • Question LG 6-2 was added to describe the accounting when a portion of an asset is leased back under a finance lease in a sale and leaseback transaction.
  • LG 6.3.5.4 was added to discuss the accounting when a seller-lessee has a contingent repurchase option.
  • LG 6.6 was added to discuss the impact of sale and leaseback transactions on business combinations.
LG 7, Leveraged leases
  • LG 7.2.1 was updated to include additional information on the classification requirements for a leveraged lease.
  • LG 7.2.3.1 was added to address presentation of investment tax credits for a leveraged lease.
  • LG 7.3.3.1 was added to address the effect on leveraged leases from in timing of income tax cash flows.
  • Example LG 7-1 was added to illustrate how a lessor should consider changes in timing of income tax cash flows.
  • LG 7.4 was updated to include additional guidance on leveraged leases acquired in a business combination.
LG 8, Other topics
  • LG 8.2.3 was added to reflect interpretive guidance on accounting by a sublessee.
  • LG 8.6.1 was updated to include interpretive guidance on how an acquirer should consider extension or purchase options in a lease, when the assumptions differ from those of the acquiree.
  • LG 8.6.1.2 was added to include interpretive guidance on an acquirer’s accounting when its policy to combine lease and nonlease components differs from that of the acquiree.
  • LG 8.6.1.2 was added to include interpretive guidance on accounting for acquired related party leases with off-market terms.
LG 9, Presentation and disclosure
  • LG 9.2.1.2 was updated to include further discussion on balance sheet presentation of the lease liability.
  • LG 9.2.3.2 was updated to include further discussion on how lease payments should be reflected in the statement of cash flows using the indirect method.
  • LG 9.2.3.3 was added to discuss how lessee payments and lessor reimbursements during the construction period should be reflected in the statement of cash flows.
  • LG 9.2.6 was added to include a discussion on lessee interim disclosure requirements.
LG 10, Effective date and transition
  • LG 10.2 was updated for the effective date amendments included in ASU 2020-05.
  • Question LG 10-9 was updated to reflect additional interpretive guidance related to previous impairments under ASC 360.
Copyrights
This publication has been prepared for general informational purposes, and does not constitute professional advice on facts and circumstances specific to any person or entity. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication. The information contained in this publication was not intended or written to be used, and cannot be used, for purposes of avoiding penalties or sanctions imposed by any government or other regulatory body. PricewaterhouseCoopers LLP, its members, employees, and agents shall not be responsible for any loss sustained by any person or entity that relies on the information contained in this publication. Certain aspects of this publication may be superseded as new guidance or interpretations emerge. Financial statement preparers and other users of this publication are therefore cautioned to stay abreast of and carefully evaluate subsequent authoritative and interpretative guidance.
The FASB material is copyrighted by the Financial Accounting Foundation, 401 Merritt 7, Norwalk, CT 06856, and is reproduced with permission.
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