Disclosure Requirements Explained Under ASC 842

Last Updated on October 6, 2023 by Morgan Beard

Under ASC 842, lease disclosure requirements were created with the intent to provide financial statement readers with more transparent insights into the lease activities of a given entity. Thus allowing them to “assess the amount, timing, and uncertainty of cash flows arising from leases.”

Both qualitative and quantitative information will inform the reader as to the methodology behind the lease classification determination. In addition, it provides an overview of any assumptions that were made in accounting for the leases, both operating and finance. Below we outline the common disclosure requirements under ASC 842 and they can be broken down into two major categories: Quantitative Disclosures and Qualitative Disclosures.

Quantitative Disclosures

Financial Statement Disclosures

The right-of-use assets (ROU assets) and lease liabilities for every finance and operating lease must be disclosed explicitly on the balance sheet. This is the heart and soul of the ASC 842 lease accounting guidelines. Similarly to ASC 840, ASC 842 requires a lessee to disclose a maturity analysis of its finance lease liabilities. This requirement asks that they highlight the undiscounted cash flows for at least the first five years following the financial statements date as well as for the remaining years.

Statement of Comprehensive Income

• Finance Lease – Present the interest expense on the lease liability as well as the ROU asset amortization schedule.  These two expenses are not required to be presented as separate line items and shall instead be presented consistent with how the entity presents interest expenses, depreciation and/or amortization of similar assets.
• Operating Lease – the lease expense shall be included in the lessee’s income from continuing operations. 

Statement of Cash Flow

The presentation of expenses and cash flows will differ based on how a lease is classified under ASC 842.

• Finance Lease  – The principal portion should be classified as financing activities and related interest expense is classified similarly as interest paid. 
• Operating Lease – Lease payments—including variable payments—are classified within operating activities, except for expenditures to make the asset ready for use. These are instead  classified as investing activities. 

Qualitative Disclosures

FASB has outlined explicit quantitative disclosures requirements under ASC 842. It is their viewpoint that financial statements readers will gain a better understanding of an entity’s lease activities using these disclosure requirements as guidance. Here is a list of qualitative disclosures:

• Information as it pertains to the nature of the lease
• Information about leases that have not yet met the lease commencement date yet create significant lease liabilities for the lessee

Assumptions and Judgements

With ASC 842 guidelines there are “bright line” tests to determine lease classification and lease contract criteria. But there is also room for significant assumptions and judgments. Some of which includes:

• The determination of whether a contract contains a lease
• The consideration within a contract between the lease components and the non-lease components and of course whether the practical expedient has been applied.
• The determination of the discount rate for a lease

Leaseback Transactions

When a leaseback transaction qualifies as a sale, then ASC 842 requires that the seller / lessee disclose the main terms and conditions of the transaction. In addition, the lessee must disclose any gains or losses from the sale-leaseback. Which will be separate from the sale of any other assets.

Practical Expedients

Practical expedients are relief measures instituted to ease the time, cost and overall effort of ASC 842.  In essence, the entity must make an assumption or judgement on whether or not their contract in question meets the appropriate criteria to implement the practical expedient. 

Disclosures Evaluation

Financial statement preparers and their auditors will need to evaluate at what level of depth and disaggregation those disclosures will need to be, remembering that the FASB expects disclosures should reflect the significance of an entity’s leasing arrangements. So, as your finance and accounting teams start to determine their plan on How to Transition to the ASC 842 Lease Accounting Standards they’ll want to develop clear and concise action plans for capturing lease data as well as for deciding on lease assumptions. The best approach is to start planning early for your disclosure requirements and investigate lease management and lease accounting software partners that can store and organize an entity’s disclosure reports.

Accounting Guidance Referenced:

• ASC 842-20-45-4
• ASC 842-20-50- 3
• ASC 842-20-50-4
• ASC 842-20-50-8 

Check out our Lease Accounting Compliance Hub for all things ASC 842.