What is the definition of a practical expedient under ASC 842 and IFRS 16?

The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) are not blind to the tedious task facing firms once the new standards take effect. Hence, the creation of practical expedients.

What is a Practical Expedient?

Practical expedients are considerations, or shortcuts companies can elect to lessen their burden in the adoption of ASC 842 and IFRS 16. They were designed to provide relief for companies during the transition to the new standards.

The ASC 842 Transition Examples

There are various practical expedients published by the boards shortly after the release of the new lease accounting standard.

The ASC 842 Practical Expedient Package

One of the practical expedients provided to ease the ASC 842 lessor accounting is the package deal where companies have the option of using all three lease portfolio practical expedients together or none at all. Electing this practical expedient package lease means applying them all consistently across all leases. Plus, according to the ASC 842 disclosure requirements, businesses must disclose that they have used all three expedients.

The three all-or-nothing practical expedients are the following:

• Businesses don’t have to reassess the lease classification for both expired or existing leases
• Businesses don’t have to reevaluate if the expired or existing contracts have leases
• Businesses don’t have to reassess already recorded initial direct costs of any of the existing leases

 

These three practical expedients can reduce significantly the time spend on re-evaluating leases, thus also reducing the costs of preparing the financial statements to comply with the ASC 842 transition requirements.  Companies that choose not to use this package will have to deal with the following:

• Reassessing initial direct costs also means dealing with an equity adjustment
• Re-evaluating of all leases to determine whether each lease should be classified as a finance or operating lease following the new standards
• Re-evaluating all existing expired leases

Companies, however, might not want to use the package since they might benefit from reassessments of their leases. For example, if most of a business’s operating leases would qualify as finance leases following the ASC 842 standard, then reclassification would impact the EBITDA. Thus, businesses may decide not to use the practical expedient package.

Learn about expedients now, choose your options early!

The ASC 842 practical expedients you elect to use will have a huge impact on:

• What lease data you need to collect
• How you need to break the data down
• How you will configure your lease accounting system

While a practical expedient might save you time, your decision must also consider its potential impact on your financial reporting. So, although FASB has extended the compliance deadline — giving private companies until 2021 to report their leased assets on balance sheets — it’s important to understand the implications and make your decisions about ASC 842 practical expedients as soon as possible.

If you are unsure what to do, speak with your accounting advisory partner, who can help to guide you through the ASC 842 transition requirements and your practical expedient decisions.