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Effective date and transition

Note that in this section, “fixed” could also include payments based on an index or rate.

We believe that a lessee has asserted a policy with regards to including or separating the fixed
executory costs based on what the lessee disclosed in its commitments footnote. Note that variable or
contingent payments for executory costs would generally be excluded from minimum rental payments
irrespective of the treatment of fixed executory costs. Therefore, we believe a lessee should transition
its operating gross leases to ASC 842 consistent with its historical accounting policy as follows:

□ If a reporting entity has a historical accounting policy to exclude executory costs from minimum
lease payments under ASC 840, then executory costs should be excluded from minimum rental
payments in transition. Therefore, the portion of payments attributable to these executory costs
would not be included in the measurement of the initial lease liability.

□ If a reporting entity has a historical accounting policy to include executory costs in minimum lease
payments under ASC 840, then fixed executory costs should be included in minimum rental
payments in transition. Therefore, the fixed portion of payments attributable to those executory
costs would be included in the measurement of the initial lease liability.

If a lessee wants to change how executory costs are treated for existing leases, but is not electing to
combine nonlease and lease components under ASC 842, it would need to apply the guidance in ASC
250, Accounting Changes and Error Corrections, including an evaluation of preferability. For
example, if the lessee has historically included fixed executory costs in its commitments footnote and it
wants to exclude these amounts from its lease liability at transition for existing leases, it would need to
treat this as a change in accounting policy and consider whether such a change is preferable.

Question 10-8

How does the treatment of executory costs at transition impact subsequent accounting in the event of
a reassessment trigger or a modification that is not considered a new lease?

PwC response
We believe a lessee’s separation (or non-separation) during transition creates a unit of accounting that
should be carried forward on and after the effective date. For example, assume a gross lease has two
nonlease components: maintenance (an executory cost) and ancillary services (not associated with
maintenance) provided by the lessor. Assume the lessee chooses to separate nonlease components
other than executory costs from the associated lease component during transition. If the lessee does
not separate maintenance from the lease component in transition due to its existing accounting policy
under ASC 840 but separates the ancillary services at transition, the two units of accounting
established in transition would be (1) the lease component that includes maintenance and (2) the
ancillary services nonlease component. These would remain consistent even in the event of a
modification that is not a new lease or remeasurement on or after the effective date.

Lessee elects to combine nonlease and lease components

A lessee may choose to not separate nonlease components other than executory costs from the
associated lease components for existing leases at transition if, and only if, the lessee makes an
accounting policy election by class of underlying asset to not separate nonlease components from the
associated lease components for new leases on and after the effective date. We believe a lessee that
elects to combine lease and nonlease components under ASC 842 may also apply that election to
existing leases at transition without applying ASC 250, Accounting Changes and Error Corrections,
since the change arises from the adoption of a new accounting standard.
10-15