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Effective date and transition

not ceased use of the leased space for the term of the head lease. We believe it would be appropriate to
analogize to the guidance for liabilities under ASC 420 in transition to ASC 842. Consequently, the
right-of-use asset recognized at transition should be reduced (netted) by the carrying amount of the
sublease liability. Alternatively, we would not object to a reporting entity writing off an existing
sublease liability at the application date with an adjustment to opening equity at transition. In this
latter case, the reporting entity should also perform an impairment test of the right-of-use asset at the
application date. See LG 10.4.1.3.

10.4.1.1 Discount rate considerations

The discount rate used to calculate the present value of the future payments should be determined at
the application date as discussed in LG 10.3. For example, a calendar year-end public business entity
that chooses not to adjust comparative periods would determine the rate as of January 1, 2019. See LG
3.3.4.6 for information on determining the discount rate, including specific private company
considerations. When a lessee uses its incremental borrowing rate as the discount rate at transition,
the transition guidance does not specify whether the rate should be based on the original lease term or
the remaining lease term. We believe that the selection of a rate that is based on either the original
lease term or the remaining lease term is reasonable. The approach should be consistently applied.

10.4.1.2 Minimum lease payments or minimum rental payments

At transition, a lessee is required to measure a lease liability for leases classified as operating under
current GAAP equal to the sum of the present value of (1) the remaining minimum rental payments (as
defined in ASC 840), and (2) any amounts probable of being owed by the lessee under a residual value
guarantee as defined under the leases standard. When lease classification has not changed, the lease
payments used for measurement purposes should be based on the same data as under ASC 840. If the
entity has not elected hindsight, the lease term used to determine the payments should be the same as
what was used under ASC 840 at lease inception (or the latest reassessment of lease term if the lease
had been modified).

Variable payments

ASC 840 requires that variable payments (contingent rentals) that are based on an index or rate be
included in minimum lease payments based on the index or rate existing at lease inception (or as of
the modification date if the lease has been modified). However, there is diversity in practice regarding
how lessees treat rent payments based on an index or rate in their commitments footnote under ASC
840. Some lessees use the inception index or rate whereas others update the amount to reflect the
current index or rate. The transition guidance in the new leases standard does not explicitly state
whether the index or rate used to measure the lease liability for an operating lease should be as of the
transition date or as of the inception of the lease.

We believe that if the lessee historically disclosed the amount of its commitments for operating leases
using the index or rate as of the inception of the lease (consistent with the index or rate in effect under
ASC 840 that was used to calculate the minimum rental payments), then that rate should be used in
measuring the initial lease liability at transition for existing leases. If a lessee that previously used the
inception index or rate in its commitment footnote wants to use the current index or rate to measure
the lease liability at transition for existing leases, it would need to apply the guidance in ASC 250,
Accounting Changes and Error Corrections, including an evaluation of preferability. Note that in
evaluating preferability, the SEC staff has indicated that it may be reasonable to conclude that the use
of a current index or rate better reflects the lease liability at transition.

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