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Effective date and transition
subsequent income recognition. Paragraph BC394 in the Basis for Conclusions of ASC 842 indicates
that the Board intended for the application of the hindsight election to result in more accurate,
updated information for financial statement users. Consequently, we believe a lessor may apply the
following approach to transition existing sales-type and direct financing leases when the lessor elects
to apply hindsight:
□ Apply hindsight at the lease inception date to determine the appropriate lease term and implicit
interest rate.
□ Using such discount rate, recalculate the new net investment in the lease balance under ASC 840
using the revised lease payments as of the application date as though the lease term was always the
updated lease term based on hindsight.
□ Any difference between the recalculated and existing balances at the application date should be
recorded as an adjustment to opening equity. Note, however, that if the reporting entity has
elected to adjust the comparative periods upon adoption and the lease commenced during the
comparative periods, the adjustment should be reflected in earnings during the comparative
periods.
The lessor should then follow the transition accounting in ASC 842-10-65-1(x) using the recalculated
balances.
10.3.1.3 Land easements practical expedient
An optional practical expedient is available that allows a reporting entity to choose to not apply the
leases standard to certain existing land easements at transition. See LG 2.3.2.1 for additional
information.
ASC 842-10-65-1(gg)
An entity also may elect a practical expedient to not assess whether existing or expired land easements
that were not previously accounted for as leases under Topic 840 are or contain a lease under this
Topic. For purposes of (gg), a land easement (also commonly referred to as a right of way) refers to a
right to use, access, or cross another entity’s land for a specified purpose. This practical expedient shall
be applied consistently by an entity to all its existing and expired land easements that were not
previously accounted for as leases under Topic 840. This practical expedient may be elected separately
or in conjunction with either one or both of the practical expedients in (f) and (g). An entity that elects
this practical expedient for existing or expired land easements shall apply the pending content that
links to this paragraph to land easements entered into (or modified) on or after the date that the entity
first applies the pending content that links to this paragraph as described in (a) and (b). An entity that
previously accounted for existing or expired land easements under Topic 840 shall not be eligible for
this practical expedient for those land easements.
10.4 Lessee transition
The transition guidance for a lessee differs depending on the classification of the lease. Given that the
practical expedients discussed in LG 10.3.1.1 allow reporting entities to avoid reconsidering lease
classification, we expect that many lease arrangements will retain their original classification and
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