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Topic 842 requires that initial

direct costs be added to the
right-of-use asset and included

in its subsequent amortization.

By Robert Singer, Ph.D.; James Bosnick, J.D.;
Bailey Hays; and John Loughlin, Ph.D.

ASB Accounting Standards Codification (ASC) About the authors
Topic 842, Leases, issued in February 2016, marked
Fa significant overhaul in the financial reporting of Robert Singer, Ph.D.,
long-term leases. Its adoption created many challenges for is a professor of
public and nonpublic entities alike. Where the previous accounting; James
guidance (FASB ASC Topic 840, Leases) was based on a Bosnick, J.D., is an
risk-and-reward model, Topic 842 is based on determin- associate professor
ing whether a contract conveys the right to control the of accounting; John
use of an identified asset. In turn, this transition in model Loughlin, Ph.D., is an
formulation underlies a fundamental change in how associate professor
entities define leases, differentiate lease from nonlease of finance, and
components, determine who are the lessee/lessor par- Bailey Hays, M.Acc.,
ties in complex property transactions, and measure and is a career strategist
recognize income statement effects. This article explains at the Center for
the guidance as it relates to accounting for deferred rent Engaged Learning,
and initial direct cost under Topic 842. To provide context all at Lindenwood
for this discussion, we first direct our consideration toward University in
the accounting treatment of these two areas under the St. Charles, Mo.
previous guidance, Topic 840.

TOPIC 840 TREATMENT OF INITIAL DIRECT COST
AND DEFERRED RENT
Consider the following fact pattern:
■ The parties enter a 20-year operating lease.
■ The agreement calls for cash payments of $1,000,000
for the first five years, with a 10% escalation of the
payments after the first five years and every five years
thereafter.

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