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Effective date and transition

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.

10.4.1 Operating leases

If a lease was classified as an operating lease under the guidance in ASC 840 and will continue to be
classified as an operating lease under the leases standard, the lessee should recognize a right-of-use
asset and lease liability at the application date of the leases standard. The application date for
companies that choose to adjust comparatives periods is the later of: (1) the beginning of the earliest
comparative period presented (e.g., 1/1/2017 for a calendar year-end public business entity) and (2)
the commencement date of the lease. The application date for companies that choose to not adjust
comparative periods is the effective date (e.g., 1/1/2019 for a calendar year-end public business entity).

However, as discussed in LG 2.2.1, a lessee may elect not to recognize right-of-use assets and lease
liabilities arising from short-term leases. If a lessee makes this election, it would not apply the
transition guidance outlined in this section to such leases. Instead, the lessee should continue to
recognize those lease payments on a straight-line basis and variable payments in the period in which
the obligation for those payments is incurred.

For leases other than short-term leases when a lessee has made an election to not recognize a lease
liability and right-of-use asset, the lease liability should be calculated as the present value of the sum
of (1) the remaining minimum rental payments (as defined under ASC 840) and (2) any amounts
probable of being owed by the lessee under a residual value guarantee.

A lessee should measure the operating lease right-of-use asset at an amount equal to the lease liability,
adjusted for the following:

□ Prepaid or accrued rent

□ Remaining balance of any lease incentives

□ Unamortized initial direct costs

□ Any impairment

□ The carrying amount of any liability related to the lease recognized in accordance with ASC 420,
Exit or Disposal Cost Obligations

Unless the entity elects the package of practical expedients discussed in LG 10.3.1.1, unamortized
initial direct costs remaining at the application date that would not have qualified for capitalization
under the leases standard should be written off with an offsetting entry to equity (or earnings if the
entity chooses to adjust comparative periods and the costs were incurred after the beginning of the
earliest period presented).

Also, refer to LG 10.3.1.2 when the hindsight practical expedient is elected, regarding whether existing
balances should be adjusted.

The transition guidance in ASC 842 does not explicitly discuss the treatment of sublease liabilities
under ASC 840. These liabilities arise in certain sublease transactions when the underlying asset was
subleased at a loss. Certain of these transactions are not in the scope of ASC 420 when the entity has

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