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Effective date and transition

Lease classification

Upon adoption of the leases standard, a reporting entity is required to determine the appropriate lease
classification for each lease subject to the standard, unless it elects the practical expedients. Although
lessees with operating leases that adopt the package of practical expedients will still be required to
recognize leases on the balance sheet, lessees and lessors that elect the practical expedients will
generally not need to reconsider how they classified leases that commenced before the effective date.
Reconsideration would occur only if required by other lease guidance.

It is possible for a lease to be classified differently under the leases standard than it was under legacy
guidance (e.g., leases previously classified as operating leases may now be classified as financing,
sales-type, or direct financing leases and vice versa) but instances of such a difference in classification
are expected to be infrequent.

Given that the practical expedients allow reporting entities to avoid reconsidering lease classification,
we expect that many lease arrangements will retain their original classification and therefore, the
accounting for a change in classification is not discussed in this guide. Readers should refer to ASC
842-10-65-1 for guidance.

Irrespective of whether the package of practical expedients is elected, reporting entities will need to
apply the new leases guidance after the effective date, which may result in a subsequent change in
lease classification in certain cases. For example, if after the effective date a triggering event occurs
that results in a reassessment of the lease term, the classification of the lease may change under ASC
842. See LG 5 for information on lease reassessment.

Question 10-3

If a reporting entity does not elect the package of practical expedients, should the entity reassess lease
classification under the leases standard as of the lease commencement date or at the application date?

PwC response
We believe a reporting entity should reassess lease classification as of the commencement date of the
lease or the last time the lease classification was required to be reassessed under ASC 840, for
example, a lease modification date. Under ASC 842, an assessment of classification is required at the
commencement date and when a lease is modified. For a reporting entity that is not electing the
package of practical expedients, the objective is to achieve the lease classification that would have
occurred had ASC 842 always been in effect. This can only occur if classification is assessed as of the
most recent date that reassessment would have been required.

Initial direct costs

The definition of initial direct costs under the leases standard is narrower than the previous guidance.
A reporting entity with unamortized initial direct costs that do not qualify for capitalization under the
leases standard that elects the practical expedients may incur more amortization in future periods
than if they had not elected the practical expedients. Nevertheless, a reporting entity may find that the
cost of reassessing unamortized initial direct costs does not justify any perceived benefit.

10-6