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Effective date and transition

10.4.2 Capital leases

If a lease was classified as a capital lease under the guidance in ASC 840 and will be classified as a
finance lease under the leases standard, the lessee should reclassify the existing capital lease asset as a
right-of-use asset and the existing obligation as a lease liability for each period the lease was
outstanding beginning with the earliest period presented (if the entity chooses to adjust comparative
periods) or the effective date (if the entity chooses not to adjust comparative periods). That is, the
initial right-of-use asset and lease liability will be based on the guidance in ASC 840 for capital lease
assets and capital lease obligations. However, refer to LG 10.3.1.2 and LG Question 10-6 when the
hindsight practical expedient is elected.

If the entity elects the package of practical expedients discussed in LG 10.3.1.1, it does not reassess
unamortized initial direct costs. If a reporting entity does not elect the package of practical expedients,
costs that do not qualify for capitalization under the leases standard should be written off with an
offsetting entry to equity unless the entity chooses to adjust comparative periods and the costs were
incurred after the beginning of the earliest period presented, in which case they should be written off
to earnings in the comparative period. Any unamortized initial direct costs that meet the definition of
initial direct costs under the leases standard should be included in the right-of-use asset established at
transition.

For reporting entities that choose to adjust comparative periods presented before the effective date, a
lessee should measure the right-of-use asset and liability in accordance with the subsequent
measurement guidance in Topic 840 during the comparative periods.

Beginning on the effective date, a lessee should measure the right-of-use asset and lease liability in
accordance with the subsequent measurement guidance in the leases standard (see LG 4.4.1). A lessee
should not, however, remeasure the right-of-use asset or lease liability for changes in the amount
probable of being owed under a lessee-provided residual value guarantee. For leases that were capital
leases under ASC 840, in cases when remeasurement of the lease liability is required for any reason,
the lessee should continue to measure the residual value guarantee it provides on the basis of the
stated amount, not the amount probable of being owed. See LG 5 for information on lease
remeasurement.

10.4.3 Modifications during the look-back period

Generally, when there is no change in lease classification, a lessee that elects to adjust comparative
periods will apply the modification guidance in ASC 840 for modifications that occur during the
comparative periods presented. If the lease classification changes, the lessee should use the
modification model in ASC 842 irrespective of whether the modification took place during the
comparative periods or after the effective date. Absent a modification, a lessee should not reassess or
remeasure leases during the comparative periods under the leases standard.

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