This session will discuss ASC 842 specifically as it relates to not-for-profit entities. We will highlight some of the key changes as they relate to NFPs and discuss accounting treatment specific to not-for-profits.

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Implementing ASC 842 Changes
Al Erdmann, CPA, CGMA
Partner, Audit Services Leader, Real Estate Services Group

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REMINDER OF EFFECTIVE DATE
Fiscal years beginning after December 15, 2021 (calendar year 2022) for
nonpublic companies
Interim periods beginning after December 15, 2022 (calendar year 2023) for
nonpublic companies
So, technically, don’t need to report under ASC 842 until next busy season
(2023), but we should recommend that clients do not wait to comply. Early
adoption is still permitted.

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EXCEPTIONS
Short-term leases
A lease that, at the commencement date, has a lease term of 12 months or less and does not include an
option to purchase the underlying asset that the lessee is reasonably certain to exercise.
Lease Term
The noncancellable period for which a lessee has the right to use an underlying asset, together with all of
the following:
a. Periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option
b. Periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option
c. Periods covered by an option to extend (or not to terminate) the lease in which exercise of the option is controlled by
the lessor.
TAKEAWAY
Even if a short-term lease is excluded from the liability and ROU calculation, an entity is still required to
disclose the total expense incurred for short-term leases in the aggregate.

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EXCEPTIONS
What is “reasonably certain”?
Changed from “reasonably assured” to conform to IFRS
Meant to be a high bar, believed to be 75%-80%
TAKEAWAY
The likelihood of including renewal options is not that high. Remember, it is
management’s conclusion to make, and there is a required disclosure for why or why not
an option was included in the calculation. (subject to materiality, of course)

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EXCEPTIONS
Low-value Leases
IFRS establishes a bright-line $5,000 threshold for exempting a lease from treatment
under IFRS 16.
ASC 842 has no such threshold, but the FASB admits that materiality still applies.
TAKEAWAY
In applying materiality, you should consider the overall effect on the financial statements
in the aggregate.

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a. Leases of intangible assets (see Topic 350, Intangibles—Goodwill and Other).
b. Leases to explore for or use minerals, oil, natural gas, and similar nonregenerative resources (see Topics 930,
Extractive Activities— Mining, and 932, Extractive Activities—Oil and Gas).
c. Leases of biological assets, including timber (see Topic 905, Agriculture).
d. Leases of inventory (see Topic 330, Inventory).
e. Leases of assets under construction (see Topic 360, Property, Plant, and
Equipment).

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Polling Question #1

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DEFINITION OF A LEASE
Topic 842 defines a lease as a contract, or part of a contract, that conveys the
right to control the use of identified property, plant, or equipment (an identified
asset) for a period of time in exchange for consideration.
Keep this in mind as we look at some case studies…

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CASE STUDY #1
A donor unconditionally promises to provide NFP A, a non-public entity, with
the free use of warehouse space for three years, beginning January 1, 20X2.
NFP A does not pay the insurance or taxes nor any noncash considerations to
the lessor. The unconditional promise to provide the space is considered to be
fully collectible. The warehouse space is in an area of town undergoing
economic revitalization and rental values are increasing at above-market rates.
The undiscounted fair value of the free rent totals $69,000 ($20,000 for 20X2,
$23,000 for 20X3, and $26,000 for 20X4), discounted at 5% to $62,370. NFP A is
responsible for utilities.
QUESTION – Is this a lease?

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A donor unconditionally promises to provide NFP A, a non-public entity, with
discounted use of warehouse space for three years, beginning January 1, 20X2.
The donor is providing the space to NFP A for a below-market rate of $5,000 per
year. There is no non-cash consideration provided by NFP A to the lessor. The
fair value of the total rental is determined to be $69,000 ($20,000, $23,000 and
$26,000 for 20X2, 20X3 and 20X4, respectively). The warehouse space is located
in an area of town undergoing economic revitalization and rental values are
increasing at above-market rates. The unconditional promise to provide the
space is considered to be fully collectible.
QUESTION – Is this a lease?

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RIGHT TO CONTROL THE ASSET
Controlling the Asset
Control over the use of the identified asset means that the customer has both
(1) the right to obtain substantially all of the economic benefits from the use of the asset and
(2) the right to direct the use of the asset.

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842-10-15-10
Even if an asset is specified, a customer does not have the right to use an identified asset if the
supplier has the substantive right to substitute the asset throughout the period of use. A supplier’s
right to substitute an asset is substantive only if both of the following conditions exist:
a. The supplier has the practical ability to substitute alternative assets throughout the period of use
(for example, the customer cannot prevent the supplier from substituting an asset, and alternative
assets are readily available to the supplier or could be sourced by the supplier within a reasonable
period of time).
b. The supplier would benefit economically from the exercise of its right to substitute the asset (that
is, the economic benefits associated with substituting the asset are expected to exceed the costs
associated with substituting the asset).
842-10-15-11 through 15 put constraints on the right of substitution. Most specifically, 842-10-15-15
reads, “If the customer cannot readily determine whether the supplier has a substantive substitution
right, the customer shall presume that any substitution right is not substantive.”

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NFP A has an agreement with University F to utilize 4 of the University’s 8
squash courts from 2:00-6:00 on Tuesdays and Thursdays throughout the school
year. NFP A pays University F $1,000 a month for use of said courts.
QUESTION – Is this a lease?

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Q: Would this clause disqualify this contract as a lease? (Polling question)

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Polling Question #2

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WHAT COSTS TO INCLUDE
842-10-15-35 The consideration in the contract for a lessee includes all of the payments described
in paragraph 842-10-30-5, as well as all of the following payments that will be made during the lease
term:
a. Any fixed payments (for example, monthly service charges) or in
substance fixed payments, less any incentives paid or payable to the lessee, other than those included
in paragraph 842-10-30-5
b. Any other variable payments that depend on an index or a rate, initially measured using the index
or rate at the commencement date.
This would include the $3/sf charge for electricity, a $2/sf minimum charge for CAM, even though
these are not lease components.

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WHAT COSTS TO INCLUDE
(m) Fixed Common Area Costs per month under Section 6.3: Commencing in the nineteenth (19th) Lease
Month of the term of this Lease, $2,563.52 ($25.55 psf/yr) through December 31, 2021, and thereafter
increasing 3% each January 1 thereafter.
Yes, it is a fixed amount, therefore, it is required to be part of consideration.
(n) Non-Binding Estimated Initial Tax Escrow Payment per month under Section 18.2: Commencing in
the nineteenth (19th) Lease Month of the term of this Lease, $1,665.33 ($16.60 psf/yr).
No, this is a budgeted amount, and any overage would be refundable. It should be
considered variable and not included as part of consideration.

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GROUND LEASE TREATMENT
A lease of any identified asset, no matter the length of the term, is
subject to ASC 842 the same as any other lease.
Therefore, the financing tests must be applied to ground leases of
land. It is quite possible that the present value of the payments
under the lease approximate “substantially all” of the current fair
value of the land. (BC113)

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GROUND LEASE TREATMENT
HOWEVER!
842-10-55-13 states that certain leases involving governmental units or authorities should all be
classified as operating leases if certain conditions are met. The conditions are primarily that the asset
be a permanent structure that is part of a bigger facility and a similar asset could not be purchased or
leased in the same service area from a nongovernmental unit of authority.

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Embedded leases are components within contracts that entail the use of a
particular asset, where the user has control over that asset. You might be
surprised at some of the types of contracts that often contain embedded
leases, even though the contract may not contain the word “lease.”
EXAMPLE – An NFP has a contract with a supplier that provides 20 laptops for
use by students at the NFP’s facility for 2 years. The contract includes unlimited
maintenance on the laptops. At the end of the 2 years, the supplier takes the
laptops back.
QUESTION – Is this a lease?

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Polling Question #3

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RATE IMPLICIT IN THE LEASE
The rate of interest that, at a given date, causes the aggregate present value of
(a) the lease payments and (b) the amount that a lessor expects to derive from
the underlying asset following the end of the lease term to equal the sum of (1)
the fair value of the underlying asset minus any related investment tax credit
retained and expected to be realized by the lessor and (2) any deferred initial
direct costs of the lessor.

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RATE IMPLICIT IN THE LEASE

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RATE IMPLICIT IN THE LEASE
REMEMBER, going forward, if the rate implicit in the lease is known, it must be
used.

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CHOOSING AN IBR
Incremental Borrowing Rate
The rate of interest that a lessee would have to pay to borrow on a
collateralized basis over a similar term an amount equal to the lease payments
in a similar economic environment.
This differs from ASC 840 that allowed an entity to use an unsecured rate in lieu of a secured rate.
Not much guidance out there, though it is clear that use of a WACC is not permitted.

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LATEST DEVELOPMENTS
ASU 2021-09
Nonpublic entities are now permitted to apply the risk-free rate based on class
of asset (previously, all-or-nothing)
• If rate implicit in lease is available, it must be used
• Transition rules are identical to those of ASU 2021-05

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TRANSITION
842-10-15-37 As a practical expedient, a lessee may, as an accounting policy election
by class of underlying asset, choose not to separate nonlease components from lease
components and instead to account for each separate lease component and the
nonlease components associated with that lease component as a single lease
component.
PRO – Easier to account for lease as a whole
CON – Risk of converting an operating lease to a finance lease
Remember, disclose, disclose, disclose

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Polling question #4

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