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Effective date and transition

Question 10-18

Should lessees account for build-to-suit transactions that existed at transition under the new build-to-
suit guidance?

PwC response
The leases standard does not specifically address how the new build-to-suit model in ASC 842 should
be applied to build-to-suit transactions that exist at transition. We believe the accounting will depend
on the stage of the project.

□ If there are no assets and liabilities recognized by the lessee as a result of a completed construction
project on the effective date (i.e., the lessee was either not the owner during construction under
ASC 840 or the transaction qualified as a sale-leaseback), we believe the lessee should follow the
normal lease transition requirements for the lease at the effective date.

□ If construction is complete as of the effective date and assets and liabilities have been and still are
recognized by the lessee as a result of the construction project as of the effective date, we believe
the lessee should derecognize such assets and liabilities pursuant to ASC 842-10-65-1(u)(1). Any
difference should be recorded as an adjustment to equity. The lessee would then follow the normal
lease transition guidance. Also refer to the response to LG Question 10-17 for additional guidance
on classifying the lease and accounting for these transactions when the lessee chooses to adjust
comparative periods.

□ If construction is still in progress as of the effective date, we believe the transaction should be
reassessed under the control-based build-to-suit model in the leases standard.

o If the lessee was deemed to be the accounting owner under ASC 840 and is not deemed to
control the asset under the new leases standard, then the lessee should derecognize such
assets and liabilities. Any difference should be recorded as an adjustment to equity. The lessee
would then follow the normal lease transition guidance. Also, refer to the response to LG
Question 10-17 for additional guidance on classifying the lease and accounting for these
transactions when the lessee chooses to adjust comparative periods.

o If the lessee was not previously the accounting owner but is deemed to control the asset under
construction under the new leases standard, the lessee should recognize the asset under
construction and a liability (A) at the later of (1) the earliest period presented or (2) the date
control over the asset under construction was established if the entity chooses to adjust
comparative periods or (B) at the effective date if the entity chooses to not adjust comparative
periods. A lessee that controls the asset being constructed under the leases standard would
also need to assess the transaction under the sale and leaseback provisions of the leases
standard upon completion of construction.

o The liability and construction asset should remain on the balance sheet if the lessee was
previously the accounting owner and is deemed to control the asset under the leases standard.
A lessee that controls the asset being constructed under the leases standard would also need to
assess the transaction under the sale and leaseback provisions of the leases standard upon
completion of construction.

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