Sharpe CPA / Footnotes / Lease footnote

Leases under ASC 842: is it one, what kind, and the note.

Walk each contract through the ASC 842 flowchart to decide whether it contains a lease, classify it by the 842-10-25 criteria, and then lay out the lessee’s note the way ASC 842-20-50 asks for it — lease cost, cash flow information, weighted averages and a maturity analysis reconciled to the liabilities. Free, and it runs in your browser.

Before the note

Is it a lease, and what kind?

The decision sequence in ASC 842-10-15 — the flowchart in 842-10-55-1 — then the classification tests in 842-10-25. Answer each question in turn; the path you take is shown, with the paragraph that decides it. Evaluate as many contracts as you like and the note below picks up the kinds of lease you found.

Contract

Classification — ASC 842-10-25

Evaluating as

The lessee The lessor

(a) Does the lease transfer ownership of the asset to the lessee by the end of the lease term?

(b) Does it grant the lessee an option to purchase the asset that the lessee is reasonably certain to exercise?

Lease term (months) Remaining economic life (months)

Commencement falls at or near the end of the asset’s economic lifeCriterion (c) is then not used (842-10-25-2(c)); one reasonable reading of “at or near the end” is the last 25%.

(d) Does the present value of the lease payments, plus any residual value guaranteed by the lessee, equal or exceed substantially all of the fair value of the asset?

Fair value of the asset Payment Frequency Number of payments Paid Annual discount rate (%) Residual value guaranteed Purchase option price, if reasonably certain

(e) Is the asset so specialized that it is expected to have no alternative use to the lessor at the end of the lease term?

ST Short-term lease: a lease term of 12 months or less at commencement, with no purchase option the lessee is reasonably certain to exercise (842-20-25-2).

Contracts evaluated

None yet.

The 75% and 90% figures are the “one reasonable approach” in 842-10-55-2, not bright lines. The judgment, and the evidence for it, belong in the file.

The standard

ASC 842, as amended.

The note follows the lessee disclosures in ASC 842-20-50 and the presentation rules in ASC 842-20-45, as amended through ASU 2023-01. The objective the Codification states is to let users assess the amount, timing and uncertainty of cash flows arising from leases.

What changed after 2016

ASU 2018-11 — the practical expedient not to separate lease and nonlease components, by class.
ASU 2021-09 — an entity that is not a public business entity may make the risk-free rate election by class of underlying asset rather than entity-wide, and must disclose the classes.
ASU 2023-01 — leasehold improvements in a common-control lease are amortized over their useful life to the common-control group; the unamortized amount being amortized beyond the lease term has to be disclosed. A private company may also use the written terms of a common-control arrangement to decide whether a lease exists.

What the note has to contain

The nature of the leases: variable payments, options, residual value guarantees, restrictions (50-3(a)).
Leases not yet commenced that create significant rights and obligations (50-3(b)).
Significant judgments: whether a contract is a lease, allocating consideration, the discount rate (50-3(c)).
Lease cost by component, cash paid, new right-of-use assets, weighted-average term and rate (50-4).
A maturity analysis for each of the next five years and thereafter, reconciled to the liabilities, separately for operating and finance leases (50-6).
Leases with related parties, accounted for on their legally enforceable terms and disclosed under ASC 850.

This lays the note out; it does not compute the lease accounting. The figures come from your lease schedules, and the CPA who signs the report owns every word. Check the current Codification text before relying on it.