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Effective date and transition
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,
unamortized initial direct costs that do not qualify for capitalization under the leases standard should
be written off with an offsetting entry to opening equity unless the entity chooses to adjust
comparative periods and the costs were incurred after the beginning of the earliest period presented.
In this case, they should be written off to earnings in the comparative period. Unamortized initial
direct costs that qualify for capitalization under the leases standard (see LG 4.3.1.2) should remain
capitalized and continue to be expensed over the lease term.
10.5.2 Direct financing and sales-type leases
If a lease was classified as a direct financing or sales-type lease in accordance with ASC 840 and will be
classified similarly under the leases standard, the lessor should continue to recognize its net
investment in the lease at the later of the earliest period presented or lease commencement. The net
investment amount is the same as the carrying amount measured using the guidance in ASC 840
immediately before that date. However, see LG 10.3.1.2 and LG Question 10-7 when the hindsight
practical expedient is elected.
For a direct financing lease, the net investment in the lease should include any unamortized initial
direct costs capitalized in accordance with ASC 840. The transition guidance in the leases standard
does not require lessors to write off initial direct costs that do not meet the definition of initial direct
costs under the new guidance even if the entity does not elect the package of practical expedients.
For lessors that choose to adjust comparative periods presented before the effective date, a lessor
should account for the lease in accordance with the subsequent measurement guidance in ASC 840
during the comparative periods. Beginning on the effective date, a lessor should account for the lease
in accordance with the recognition and measurement guidance in the leases standard. See LG 4.5.1 for
information.
10.5.3 Leveraged leases
Leases that commenced before the effective date of the leases standard that were previously
classified as leveraged leases, may continue to be accounted for as leveraged leases by the lessor.
Lessors should apply the guidance in ASC 842-50, which is consistent with legacy leveraged lease
accounting guidance. New leases (or leases not previously classified as leveraged leases) and
leveraged leases modified on or after the effective date cannot be classified as leveraged leases, but
will need to be classified using the new standard. See LG 7 for more information regarding leveraged
leases.
10.5.4 Separation and allocation of components
Under the leases guidance, a reporting entity is required to separate lease and nonlease components
and allocate consideration in the contract to each component. However, a lessor may, as an accounting
policy election by class of underlying asset, choose to not separate nonlease components from the
associated lease components and instead account for each separate lease component and its associated
nonlease components as a single lease component provided certain conditions are met. See LG 2.4 for
more information.
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