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FINANCIAL REPORTING
Although public entities 2. “An entity need not reassess the lease classifica-
tion for any expired or existing leases.” Thus,
transitioned to Topic 842 in leases classified as operating leases under Topic
840 may continue as operating leases under
Topic 842.
2019, their managers 3. “An entity need not reassess initial direct costs
for any existing leases” at transition.
Topic 842 defines initial direct costs as
continue to grapple with “[i]ncremental costs of a lease that would not have
been incurred if the lease had not been obtained.”
Under the previous guidance, initial direct costs
implementing many of its included allocated overhead. Finally, Topic 842
requires that initial direct costs be added to the
complex provisions. right-of-use asset and be included in its subse-
quent amortization.
Aside from Topic 842’s requirement that
operating leases greater than a year recognize
right-of-use assets and lease liabilities, its ef-
Accounting at lease commencement date fects on the income statement (putting aside the
difference in how initial direct costs are defined)
Debit Credit are similar to Topic 840’s. As under Topic 840,
the lease payments (including any escalations) are
Right-of-use asset $14,198,925 totaled and amortized on a straight-line basis (see
FASB ASC Paragraph 842-20-25-6) and include
Lease liability $14,048,925
amortization of initial direct cost.
The following example illustrates the treatment
Cash $150,000 of initial direct cost and deferred rent, the latter
of which is no longer recognized for balance sheet
purposes. The chart “Accounting at Lease Com-
Accounting for end of year 1 mencement Date” illustrates amortization of the
right-of-use asset and the lease liability, as well as
Debit Credit
related journal entries. Using the data in the table
“Expense and Amortization Schedule,” a lessee
Lease expense $1,167,750 would make the journal entries shown in that
chart. This entry records the operating lease and
Lease liability $297,554
payment of initial direct cost at the commence-
Right-of-use asset $465,304 ment date.
The lease liability of $14,048,925 is the
present value of lease payments discounted at
Cash $1,000,000
5%; the $150,000 of initial direct cost is added to
$14,048,925 (see column 5, “Lease Liability Bal-
ance Sheet,” in the table “Expense and Amortiza-
Accounting for end of year 15 tion Schedule”) in arriving at a right-of-use asset
amount of $14,198,925 (column 7, “Right of Use
Debit Credit Asset Balance Sheet,” in the table “Expense and
Amortization Schedule”). See the chart “Ac-
Lease expense $1,167,750 counting for End of Year 1.” This entry records
lease expense, payment, and amortization of lease
Lease liability $877,975 liability and right-of-use asset.
In the chart “Accounting for End of Year
Right-of-use asset $835,725
1,” 5% is multiplied by the lease liability of
$14,048,925 to obtain the interest portion of the
Cash $1,210,000
lease obligation ($702,446) and subtracted from
18 | Journal of Accountancy January 2023
