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Effective date and transition

ASC 842, any unamortized initial direct costs capitalized as part of the lessor’s net investment in the
lease in accordance with ASC 840 would not be written off, per ASC 842-10-65-1(x)(1).

10.3.1.2 Hindsight practical expedient

Upon transition, a reporting entity is permitted to elect to use hindsight with respect to determining
the lease term (e.g., they may consider the actual outcome or updated expectations of lease renewals,
termination options, and purchase options) and in assessing any impairment of right-of-use assets for
existing leases.

ASC 842-10-65-1(g)
An entity also may elect a practical expedient, which must be applied consistently by an entity to all of
its leases (including those for which the entity is a lessee or a lessor) to use hindsight in determining
the lease term (that is, when considering lessee options to extend or terminate the lease and to
purchase the underlying asset) and in assessing impairment of the entity’s right-of-use assets. This
practical expedient may be elected separately or in conjunction with either one or both of the practical
expedients in (f) and (gg).

As noted, this provision may be elected on its own or together with either or both the package of
practical expedients, or the land easements practical expedient, but represents a policy election that
should be applied consistently to all leases.

We expect that the application of hindsight will be challenging in many cases and could in some cases
result in a more complex transition process.

We believe hindsight extends only up until the effective date (e.g., 1/1/19 for a calendar year-end
public company) and should not incorporate information that becomes available or events that occur
after that date.

The hindsight practical expedient can only be used to refresh estimates or evaluations of contractual
terms that exist as of the time of measurement. A reporting entity that chooses to adjust comparative
periods at transition should not apply the hindsight practical expedient to push back a contractual
modification in terms such as (1) the impact of an early termination when the option to terminate was
not included in the original contract or (2) an extension of the term of the lease when that extension
option was not already included in the original contract.

Similarly, for payments based on an index or a rate, a reporting entity that chooses to adjust
comparative periods would not push back the index or rate at the effective date to measure the lease
liability as of a prior date.

A reporting entity applying the hindsight practical expedient should consider the impact on its
determination of whether a lease is a short-term lease. For example, a lease may have commenced 15
months prior to the effective date with an original lease term of 10 months with a renewal option for
an additional 10 months. Assume exercise of the renewal option was not reasonably assured at lease
commencement, but the company subsequently exercised the renewal option. This lease would not
meet the definition of a short-term lease because the lease term as of its commencement date using
hindsight is 20 months.

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