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Effective date and transition

If a lessee elects to not adjust the comparative periods, we believe the lessee should present their
comparative periods as they had before adopting ASC 842. We believe that the Board’s intent in
providing the optional transition method was to allow entities to continue to report leases for the
comparative period as they had under ASC 840.

10.4.1.3 Impairment

At transition, a lessee should consider whether adjustments are needed for any impairment when
determining the amount of the right-of-use asset to record.

We believe that the FASB did not intend for lessees to adjust prior period impairment measurements
or allocations to an asset group under ASC 360, Property, Plant, and Equipment upon adoption of the
leases standard. If an asset group that includes an operating lease had been impaired under current
GAAP, an allocation of the prior period asset group impairment should not be included in the
measurement of the operating lease right-of-use asset upon adoption of the leases standard. Instead, a
right-of-use asset for a lessee’s operating lease should be assessed for impairment under current
GAAP, for example, ASC 420, Exit or disposal cost obligations (if the entity has ceased use of the
leased asset), or ASC 840 (if the lessee subleased the underlying leased asset at a loss) during the look-
back period. The impairment provisions of ASC 360 would apply only on or after the effective date of
the new standard, unless the scenario in LG Question 10-9 applies.

Question 10-9

If previous impairments under ASC 360 in excess of the carrying value of long-lived assets within the
asset group were identified prior to the effective date, but were not able to be expensed because the
assets cannot be written down below fair value (an “unrecognized impairment”), is a lessee required to
expense any additional impairment resulting from the recognition of the right-of-use asset as of the
effective date?

PwC response
We believe that an “unrecognized impairment” should be recorded at the date that the right-of-use
asset is initially recognized on the balance sheet. Therefore, if a reporting entity elects not to adjust
comparative periods, the impairment should be recorded as an equity adjustment at adoption since
the impairment is first recorded at the date of initial application (e.g., January 1, 2019 for a calendar
year-end public business entity).

10.4.1.4 Foreign currency

The transition guidance in the leases standard does not address how to treat the effects of foreign
exchange rates in a lease that is denominated in a currency other than a reporting entity’s functional
currency. As a result, certain questions have arisen.

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