ASC 842 Changes – Lease Modifications

By | November 5, 2020

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We’ve been addressing the changes FASB proposed and implemented in ASC 842 over the past couple of articles, including the changes in rate implicit in the lease, determination of IBR and leases embedded in contracts. After the break, FASB members, preparers and others reassembled to discuss another change; lease modifications. 

Here, the main issue was with regards to the complexity and costs involved with applying lease modifications in the books. This was a much bigger problem in 2020 because of the massive number of changes in leases because of the effects of COVID-19. 

The Problem 

Under topic 840 of ASC 842, if the change in lease was material enough to change the classification of lease (operating or finance), the lease would be treated as a new lease effective from the date of amendment. This resulted in increased complexities and costs, since leases needed to be accounted for anew.  

Alternatives Proposed 

Unlike other changes in ASC 842, there were no alternatives proposed by FASB or any other members, preparers and practitioners. There was no change recommend to the current U.S. GAAP, but instead, feedback was sought after. FASB was looking for views of participants in the modification framework as a whole.  

Several matters were discussed, including: 

  • Reductions in what a lease contract encompasses 
  • Requirement of entities to reassess whether the lease is operating or finance based on changes that don’t formulate a new contract 
  • How to treat termination penalties in the books and their specific entries, and 
  • Whether every modification (even a “minor” change) warrants reconsideration and reassessment of leases 

The Decision 

One of the most preferred decisions by all stakeholders was FASB’s proposal to look for ways to simplify lease modification practices, effectively reducing complexity and cost. It was agreed that ASC 842 modification framework was an improvement over ASC 840 and, therefore, the board didn’t have to revert to its guidance.  

There was a concern, however, that since lease modification issues and other ASC 842 changes were interrelated, FASB should evaluatthe impact of changes in the modification framework on other practices very carefully. ASC 606 (Lessor Accounting) is a major topic that will be impacted.  

Preparers with large lease portfolios agreed that the current modification framework made lease accounting modifications extremely hard and costly, and the financial reporting results are much more difficult for users to assess as well.  

The change in lease classification in the books (if changed) didn’t represent any actual change in the agreement and could therefore be misleading. FASB acknowledged this as an unintended consequence. 

It was agreed that the Board would look for a new modification framework. 

To learn more about other changes in lease accounting, check out our previous articles – and more that will follow! You will find a detailed documentation of changes to ASC 842 regularly, so subscribe if you would like to stay up to date.  

On the other hand, if you’re looking to jump directly into implantation of ASC 842, you can schedule a FREE demo of iLeasePro today!