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Effective date and transition

Question 10-14

Is a reporting entity required to reallocate contract consideration between revenue components and
lease components when adopting the new revenue recognition standard (ASC 606)?

PwC response
This question arises in the context of a reporting entity adopting the new revenue recognition standard
before the leases standard.

If a reporting entity adopts the new revenue standard and the leases standard at the same time and
also elects the package of practical expedients in the leases standard, the entity is not required to
reassess the accounting for lease components, including the allocations between lease and nonlease
components in contracts restated under the new revenue standard.

However, the transition guidance in the new revenue standard does not explicitly provide any relief
from the requirement to separate lease and nonlease components if a reporting entity adopts the new
revenue standard before the leases standard.

The FASB explained in a Board meeting on June 21, 2017 that it did not intend for a reporting entity to
revisit the allocation of contract consideration to lease components within the scope of the existing
leases guidance when the entity adopts the new revenue standard.

Similarly, if an element were an executory cost under ASC 840, it would not need to be separated until
the adoption of ASC 842. Also, a lessor can elect to not separate certain nonlease components under
the leases standard in certain cases as described in LG 2.4.

10.5.4.1 Presentation of tenant reimbursements – added December 2018

Lessors of real estate frequently pass the costs of insurance, maintenance, and property taxes
(collectively, executory costs) on to their lessees for reimbursement, and present the tenant
reimbursements in a separate income statement line item under ASC 840. Executory costs as defined
under ASC 840, however, are accounted for differently under ASC 842. Under ASC 842, property taxes
and insurance are not separate components in an arrangement (i.e., they are neither lease components
nor nonlease components; they are additional consideration in the contract), whereas maintenance is
a nonlease component that should be accounted for under ASC 606. (See LG 2.4.1 for additional
information on identifying lease and nonlease components.) These changes may lead to questions as to
how lessors should present these recovered costs for existing leases upon adopting ASC 842.

We believe that upon adopting ASC 842, lessors that elect the package of practical expedients
described in LG 10.3.1.1 may continue (prospectively) to present existing leases in a consistent manner
with how they had done so previously. Because this differs from the accounting under ASC 842 that
will apply to new or modified leases, lessors should disclose the difference in presentation of their
existing leases. Alternately, we believe that it would be acceptable to conform the presentation of
existing leases to the presentation of leases entered into or modified after the effective date of ASC
842.

As described in LG 2.4.4.1, lessors may also elect, by class of underlying assets, to combine lease and
nonlease components. Per ASC 842-10-65-2, this election applies to “all new and existing leases.”
Accordingly, a lessor that elects to not separate lease and nonlease components must also combine

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