The FASB recently issued guidance to make transitioning to and applying the new leasing standard easier. Accounting Standards Update 2018-11, Leases (Topic 842) Targeted Improvements (ASU 2018-11) addresses questions related to the initial adoption of the standard in comparative periods, and for lessor accounting, separating lease and nonlease components of a contract. Changes to the adoption requirements will be particularly important for SEC filers as they prepare their third and fourth quarter filings.

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A publication of the Professional Standards Group
August 2018
Public Companies Catch a Break with Leasing Standard Update
The Financial Accounting Standards Board (FASB)
recently issued guidance to make transitioning to and
applying the new leasing standard easier. Accounting
Standards Update 2018-11, Leases (Topic 842)
Targeted Improvements (ASU 2018-11) addresses
questions related to the initial adoption of the standard
in comparative periods, and for lessor accounting,
separating lease and nonlease components of a
contract. Changes to the adoption requirements will
be particularly important for SEC filers as they prepare
their third and fourth quarter filings.
Comparative Reporting Changes
As originally issued in ASU 2016-02, Leases (Topic
842), entities must use a modified retrospective
transition when adopting the new leasing standard.
This method required entities to apply to changes to
the earliest financial period presented in the financial
statements in the year of adoption.
Public companies that follow a calendar year reporting
schedule must adopt the leasing standard starting Jan.
1, 2019. Private companies following a calendar year
reporting schedule adopt the new lease guidance for
their Dec. 31, 2020 annual financial statements. The
modified retrospective transition method originally
issued meant that a public company could be required
to retroactively apply the lease accounting changes to
lease assets and liabilities starting as early as Jan. 1,
2017.
Financial statement preparers encountered some
unexpected cost and complexity in following the
modified retrospective approach. To reduce the cost
and complexity, ASU 2018-11 creates another transition
method that companies can elect to use. The new
method allows entities to adopt the new standard at
the effective date and recognize a cumulative-effective
adjustment in the opening balance of retained earnings
in the year of adoption (i.e. Jan. 1, 2019 for a public
company reporting on a calendar year). When adopting
the new method, an entity would no longer be required
to retroactively apply the standard to prior periods
presented in the financial statements.
Components of a Contract
Leases are separated into lease components and
nonlease components under Topic 842. Lessees
allocate consideration to lease and nonlease
components based on the standalone selling price of
those components. Lessors allocate consideration
using other accounting standards, such as the new
revenue recognition standard under ASC Topic 606,
Revenue from Contracts with Customers (Topic 606).
Topic 842 gives lessees an option to elect a practical
expedient to lump associated lease and nonlease
components together by class of underlying asset. If
elected, the lessee would make additional disclosures
about the combined component(s). ASU 2018-11
creates a similar practical expedient election for
lessors. Lessors will be able to elect to group lease
and nonlease components together when the following
conditions are met:
1. The nonlease components would be
accounted for under Topic 606;

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Copyright ©2018, Mayer Hoffman McCann P.C. All rights Reserved.
MHM (Mayer Hoffman McCann P.C.) is an independent CPA firm that is a member firm of Kreston International Limited, a global network of independent accounting firms.
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2. The timing and pattern of transfer are the same
for the nonlease components as the lease
components, and
3. The lease component, if accounted for
separately, would be classified as an operating
lease.
Changes also clarify that if the nonlease component(s)
are the predominant component of the combined lease/
nonlease component, the lessor should account for the
consideration of the component following the guidance
in Topic 606. If the lease component is the predominant
component, lessors should account for consideration
using the guidance in Topic 842.
Lessors who have implemented the leasing standard
early may elect the lease/nonlease component practical
expedient for the first reporting period following the
release of ASU 2018-11. They may also apply it
retroactively. All other lessors can elect the practical
expedient when they adopt the new leasing standard.
If elected, lessors must apply the practical expedient
by underlying asset class to all lease transactions that
qualify for the expedient as of the election date.
Pre-adoption Disclosure
The Securities and Exchange Commission (SEC) has
established expectations that publicly traded companies
will include pre-adoption disclosures to help users of the
financial statements understand how new accounting
standards will impact the financial statements once
adoption. According to SEC Staff Accounting Bulletin
(SAB) Topic 11M, a company should consider pre-
adoption disclosures including:
• A brief description of the new standard, the date
that adoption is required and the date that the
registrant plans to adopt, if earlier.
• A discussion of the methods of adoption allowed
by the standard and the method expected to be
utilized by the registrant, if determined.
• A discussion of the impact that adoption of the
standard is expected to have on the financial
statements of the registrant, unless not known or
reasonably estimable. In that case, a statement to
that effect may be made.
• Disclosure of the potential impact of other significant
matters that the registrant believes might result
from the adoption of the standard (such as technical
violations of debt covenant agreements, planned
or intended changes in business practices, etc.) is
encouraged.
Furthermore, as with the run-up to the adoption of
Topic 606, the SEC staff has communicated that there
is an expectation that the pre-adoption disclosure will
become more robust and detailed as the implementation
draws near due to the significance of Topic 842. Entities
should consider providing additional disclosure to
assist the financial statement user in understanding the
upcoming impact of adoption of this major accounting
standard by providing details regarding quantitative
and qualitative aspects, such as:
• Description of impact
• Expected changes in accounting policies
• Status of assessment including aspects not yet
addressed, if applicable
• Quantitative impact, unless not reasonably
estimable
With the issuance of ASU 2018-11 public companies
can now evaluate and conclude on a method of
adoption. Once a transition method has been selected
by a company, disclosure of the decision would be
appropriate in its filings. In addition to the transition
method, lessors should consider whether disclosure
about their decision to apply or not apply the practical
expedient to combine lease and non-lease components

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Copyright ©2018, Mayer Hoffman McCann P.C. All rights Reserved.
MHM (Mayer Hoffman McCann P.C.) is an independent CPA firm that is a member firm of Kreston International Limited, a global network of independent accounting firms.
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contact your MHM auditor to further discuss the impact on your audit or audit report.
are necessary.
For More Information
MHM will continue to monitor developments related
to the leasing standard and provide more information
as the guidance becomes available. For specific
comments, questions or concerns about the new
leasing standard, please contact us.