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Effective date and transition

10.3 Overall transition and practical expedients

Upon adoption of the leases standard, lessees and lessors are required to apply a modified
retrospective transition approach. Reporting entities are permitted to choose one of two methods to
recognize and measure leases within the scope of the leases standard:

□ Adjust comparative periods: Apply the leases standard to each lease that existed at the
beginning of the earliest comparative period presented in the financial statements (e.g., January 1,
2017 for a calendar year-end public business entity), as well as leases that commenced after that
date. The later of these two dates for a given lease is referred to as the “application date.” Under
this method, prior comparative periods presented are adjusted. For leases that commenced prior
to the beginning of the earliest comparative period presented, a cumulative effect adjustment is
recognized at that date (e.g., January 1, 2017 for a calendar year-end public business entity). The
period from the beginning of the earliest comparative period up until immediately before the
effective date is referred to as the “look-back period” (e.g., for a calendar year-end public company
adopting the standard on January 1, 2019, the look-back period is January 1, 2017 through
December 31, 2018).

□ Do not adjust comparative periods: Apply the guidance to each lease that had commenced as
of the beginning of the reporting period in which the entity first applies the leases standard
(referred to as the “application date” or the “effective date” under this method) with a cumulative-
effect adjustment as of that date. Prior comparative periods would be not be adjusted under this
method. For a calendar year-end public business entity that chooses this method, the application
date is January 1, 2019. An entity that applies this method must provide the required disclosures
under ASC 840 for all periods to which ASC 840 is applied.

Regardless of the transition method selected, the transition guidance in ASC 842 does not apply to
leases that are entered into prior to the effective date of ASC 842 but have a commencement date after
the effective date of ASC 842. In these cases, the leases accounting model in ASC 842 should be
applied at the commencement date of the lease.

Application of the modified retrospective transition approach under both of these methods to each
lease type is discussed in the following sections.

A lessee may elect not to apply the recognition requirements in the leases standard to short-term
leases (a lease that at commencement date has a lease term of 12 months or less and does not contain a
purchase option that the lessee is reasonably certain to exercise).

Question 10-1

Is a lease that has a remaining term at the application date of 12 months or less but whose lease term
at the commencement date is greater than 12 months eligible for the short-term election?

PwC response
No. A short-term lease is defined by the lease term at the commencement date of the lease. Therefore,
if the lease has a lease term at the commencement date that is greater than 12 months, it is not eligible
for the short-term leases policy election even if the remaining lease term at the application date is 12
months or less.

10-3