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Effective date and transition

Question 10-12

If the lessee chooses to adjust comparative periods upon transition, what is the accounting for an
operating lease that is modified during comparative periods and the lease remains an operating lease?

PwC response
When a lease classified as an operating lease under ASC 840 continues to be classified as an operating
lease under ASC 842, the transition provisions require application of a hybrid model. The lessee would
recognize a lease liability and a right-of-use asset under ASC 842 for such a lease using the amounts
calculated under ASC 840 at the application date. The transition provisions in ASC 842 further
prescribe that the lessee should apply the modification and remeasurement guidance in ASC 842
should such a lease be modified after the look-back period. However, there is no guidance that
addresses the accounting when a lease is modified during the comparative periods. In such a scenario,
we believe a hybrid model should be applied as follows:

□ The lessee should use the model for modifications in ASC 840 to determine the accounting for the
modified operating lease.

□ The lessee should use the guidance in ASC 842 to recognize the modification, i.e., measure
payments based on ASC 840 but use the guidance in ASC 842 to adjust the lease liability and the
right-of-use asset.

Question 10-13

What is the accounting model when a capital lease under ASC 840 (classified as a finance lease under
ASC 842) is modified during the look-back period?

PwC response
The new leases guidance requires the modification guidance under ASC 842 to be followed when a
capital lease under ASC 840 (classified as a finance lease under ASC 842) is modified after the look-
back period. There is no guidance when such a lease is modified during the look-back period. We
believe the lessee should follow the modification guidance in ASC 840 to account for a modification
during the look-back period since there was no change in the lease classification.

10.4.4 Remeasurement events other than modifications
As discussed in LG 5.3, even if a lease is not modified, a lessee is required to remeasure lease payments
and the lease liability in certain circumstances. This includes cases in which lease payments and term
would not be required to be reassessed under ASC 840. One example of such a triggering event is a
significant event or a significant change in circumstances that is within the control of the lessee that
directly affects whether the lessee is reasonably certain to exercise or not to exercise an option to
extend or terminate the lease or to purchase the underlying asset.

In these scenarios, when a lessee recognizes a lease liability at transition, it should evaluate how the
initial lease liability should reflect the remeasurement triggering event based on its transition
elections.

10-19