Special ROU Asset Transition Adjustments - Product Advisory

January 2020

Introduction

ASC 842 and IFRS 16 require specific adjustments to the right of use (ROU) asset valuation at the DOIA or Effective Date depending on the policy elections chosen by the customer.

Adjustments Required

These adjustments are required to support customer needs where the standards require a one-time adjustment to the ROU Asset during transition.

ASC842: 842-10-65-1 (h):

Amounts previously recognized in respect of business combinations

h. If an entity has previously recognized an asset or a liability in accordance with Topic 805 on business combinations relating to favorable or unfavorable terms of an operating lease acquired as part of a business combination, the entity shall do all of the following:

1. Derecognize that asset and liability (except for those arising from operating leases for which the entity is a Lessor).

2. Adjust the carrying amount of the right-of-use asset by a corresponding amount if the entity is a Lessee.

3. Make a corresponding adjustment to equity at the beginning of the earliest comparative period presented if assets or liabilities arise from leases classified as sales-type leases or direct financing leases in accordance with Topic 840 for which the entity is a Lessor.

LeaseAccelerator Comments:

• LeaseAccelerator adjustments will be directly to the ROU Asset balance at DOIA or the Effective Date depending on the policy election chosen. A non-exporting, placeholder Journal Entry will be generated on the Ledger Export. The offsetting journal entry line item will be shown as a system configured account. This account will not appear on the Ledger Configuration screen but will appear on reports with an Account Name labeled with “Adjusting Entry” or in some cases it may include the coding convention and Adjusting Entry.

• Customers must record the appropriate adjusting entry directly to the ERP to transfer the existing balance to the appropriate ROU Asset account. 

• Customers not electing the practical expedient to eliminate Comparative Reporting should record this adjustment to the ERP at the Effective Date. The amount, however, must be equal to the “roll forward” amount at the Effective Date. The amount submitted to LeaseAccelerator must be the balance at DOIA. 

• LeaseAccelerator ASC 840 Ledgers which continue to function and may be used for “Frozen GAAP” reporting are unaffected.

• All future activity will be properly calculated based on the adjusted balance.

ASC842: 842-10-65-1 (p)

Lessees

Leases previously classified as operating leases under Topic 840

p. Any unamortized initial direct costs at the later of the beginning of the earliest period presented in the financial statements or the commencement date of the lease that do not meet the definition of initial direct costs in this Topic shall be written off as an adjustment to equity at the later of the beginning of the earliest period presented in the financial statements and the commencement date of the lease.

LeaseAccelerator Comments:

• If customers included Initial Direct Costs (IDC) for ASC 840 Accounting applying the ASC 840 definition, some of these costs may not qualify under ASC 842. If customers did NOT choose the Practical Expedient Bundle of 3 which includes the ability to not reassess IDCs, then an adjustment to the ASC 842 ROU Asset may be required in the Transition Ledger to de-recognize the portion of the new balance created from the associated Pre-Paid IDC account used in ASC 840.  

• LeaseAccelerator adjustments will be directly to the ROU Asset balance. A nonexporting, placeholder Journal Entry will be generated on the Ledger Export. The offsetting journal entry line item will be shown as a system configured account. This account will not appear on the Ledger Configuration screen but will appear on reports with an Account Name labeled with “Adjusting Entry” or in some cases it may include the coding convention and Adjusting Entry.

• Customers should record the appropriate write-off entry within their ERP ledger for ASC 842 accounting. 

• LeaseAccelerator ASC 840 Ledgers which continue to function and may be used for “Frozen GAAP” reporting are unaffected. 

• All future activity will be properly calculated based on the adjusted balance.

IFRS16: C10 (b): 

C10 A: Lessee may use one or more of the following practical expedients when applying this Standard retrospectively in accordance with paragraph C5(b) to leases previously classified as operating leases applying IAS 17. A Lessee is permitted to apply these practical expedients on a lease-by-lease basis:

(b) a Lessee may rely on its assessment of whether leases are onerous applying IAS 37 Provisions, Contingent Liabilities and Contingent Assets immediately before the date of initial application as an alternative to performing an impairment review. If a Lessee chooses this practical expedient, the lessee shall adjust the right-of-use asset at the date of initial application by the amount of any provision for onerous leases recognized in the statement of financial position immediately before the date of initial application.

LeaseAccelerator Comments:

• LeaseAccelerator adjustments will be directly to the ROU Asset balance. A nonexporting, placeholder Journal Entry will be generated on the Ledger Export. The offsetting journal entry line item will be shown as a system configured account. This account will not appear on the Ledger Configuration screen but will appear on reports with an Account Name labeled with “Adjusting Entry” or in some cases it may include the coding convention and Adjusting Entry.

• Customers must record the appropriate adjusting entry directly to the ERP to transfer the existing balance to the appropriate ROU Asset account. 

• LeaseAccelerator IAS 17 Ledgers which continue to function and may be used for “Frozen IAS 17” or other statutory reporting are unaffected.

• All future activity will be properly calculated based on the adjusted balance.

IFRS16: C10 (d): 

C10 A: Lessee may use one or more of the following practical expedients when applying this Standard retrospectively in accordance with paragraph C5(b) to leases previously classified as operating leases applying IAS 17. A Lessee is permitted to apply these practical expedients on a lease-by-lease basis:

(d) a Lessee may exclude initial direct costs from the measurement of the right-of-use asset at the date of initial application.

LeaseAccelerator Comments:

• LeaseAccelerator transition policy elections chosen during Transition assume that customers will choose all the Lease by Lease elections as noted below:

• Customer elects the following which may be applied on a lease by lease basis: 1. A single discount rate may be applied to leases with similar characteristics; 2. For previous Operating Leases where the term ends within 12 months of the DOIA, these leases may be treated as Short-Term Leases; and 3. Initial Direct Costs (IDCs) may be excluded from the ROU Asset valuation at DOIA.

• By choosing this election, customer acknowledges that LeaseAccelerator will treat all prior Operating leases with terms ending within 12 months of DOIA as ShortTerm leases. Customer asserts that the schedule-level data or default settings captured in LeaseAccelerator implicitly satisfy election for bullets 1 and 3.

• Customers may choose to adjust the ROU Asset value for IDCs which may not have been included in their initial portfolio data. Additionally, for customers with a multinational portfolio where the definition of IDCs may differ from those used for ASC 840 or ASC 842, the values may be adjusted through this action to their IFRS ledgers without affecting their US GAAP reporting. 

• LeaseAccelerator adjustments will be directly to the ROU Asset balance. A nonexporting, placeholder Journal Entry will be generated on the Ledger Export. The offsetting journal entry line item will be shown as a system configured account. This account will not appear on the Ledger Configuration screen but will appear on reports with an Account Name labeled with “Adjusting Entry” or in some cases it may include the coding convention and Adjusting Entry.

• Customers must record the appropriate adjusting entry directly to the ERP to record the change. 

• All future activity will be properly calculated based on the adjusted balance.

Adjustment Requests

Each of the above adjustments to the ROU Asset at the respective DOIA or Effective Date may be incorporated into your LeaseAccelerator balances through a request to LeaseAccelerator Support. If more than one of the adjustments apply to a schedule for a single standard, the amounts should be combined and submitted as a single amount. The specified amount is distributed to individual assets based on the Percent of Standalone Observable Price (SOP) for the schedule or other default methods if the SOP is not available. 

Note: Balance Adjustments are now self-service and do not require a request to Support. Users may use the Balance Adjustment Import in the Bulk Import workspace using the template available in Ask Alex or the Success Center.

Field Definitions