INSIGHT: Private Company Disclosure Requirements for Lease Accounting

Private companies aren’t always subject to the same financial disclosure requirements as public companies. But under FASB’s new lease accounting guidelines, Accounting Standards Codification (ASC) 842, both public and private companies have identical lease disclosure requirements.

Guidelines prescribed by the SEC and the FASB require companies to create various types of financial disclosures. Although SEC requirements generally only apply to public companies and some FASB requirements also only apply to public companies, for lease disclosures, FASB has the same requirements for both public and private companies. These disclosures describe a company’s leasing activities in detail to supplement the information listed on the balance sheet and income statement.

Lease disclosures help people reading financial statements assess a company’s leasing activities and future lease obligations in a format that can be compared to other companies. Because companies are responsible for creating their own financial statements and disclosures, most people reviewing these records prefer that they have been reviewed by an independent auditor, lending them more credibility. Some reviewers—such as lenders, investors, or regulators—require a private company to provide financial statements and disclosures that have been assessed by an outside auditor. An auditor unaffiliated with the company, reviews its financial records and procedures to substantiate the claims made in the company’s financial statements. The auditor then issues a written opinion regarding the company’s financials. A favorable opinion basically indicates that the financial statements present the company’s performance and economic position fairly, and conform with generally accepted accounting principles (GAAP).

U.S. GAAP is developed by independent boards and organizations, one of which is the Financial Accounting Standards Board (FASB), which developed ASC 842. ASC 842 requires public and private companies to present their lease disclosure statements along with their financial statements. Unless the omission is immaterial, if a company leaves out the disclosure statement, the auditor will be required to qualify their opinion and state that the company did not present complete financial information under U.S. GAAP. This qualified audit opinion could cause people to be leery about a company’s accounting practices, as well as the accuracy and completeness of its financial statements.

Under ASC 842, a company should present two categories of disclosures for leases: qualitative and quantitative.

Examples of Qualitative Disclosures

• A general description of a company’s leases

• A list of significant judgments used when applying ASC 842 principles

• A description of key assumptions made about leases

• A narrative about lease options included or excluded from the balance sheet

Examples of Quantitative Disclosures

• Weighted average remaining lease term (the average remaining lease term for all leases, weighted according to their lease liability balances)

• Weighted average discount rate for finance and operating leases (the average discount rate that was used to calculate the lease liability balances for all leases, weighted according to the remaining balance of lease payments for each lease)

• Cash flow information on operating and finance leases

• Right of use (ROU) assets obtained in exchange for finance and operating liabilities (categorizing new ROU assets by their classification, either finance or operating)

• A lease liability maturity analysis (a chart of future lease obligations)

• A company’s total lease cost split into finance, operating, short-term, and variable categories

The full list of qualitative and quantitative disclosure details can be found on the FASB website.

Quantitative disclosures require detailed calculations that could take accountants hours or days to perform manually in a spreadsheet. However, lease accounting software can calculate the quantitative disclosures instantly as well as provide a one-page disclosure report and supporting documentation for auditors.

This column doesn’t necessarily reflect the opinion of The Bureau of National Affairs Inc. or its owners.

Author Information

Matt Waters is a CPA and Director of Lease Accounting for CoStar Manager.