accounting made sense

ASC 842 Lease Footnote Disclosure – 3 Real-World Examples

ASC 842 Lease Footnote Disclosure - 3 Real-World Examples Featured Image

Table of Contents

The introduction of ASC 842 has significantly altered the landscape of lease accounting, which now requires more detailed disclosure of leases in financial statements, especially within the footnote section. 

The authoritative guideline has listed very detailed requirements on what to disclose on the financial statement. Instead of going through every part of the guidance, let’s take a look at how large public companies have disclosed their leases in the footnote section of the annual report. By looking at real examples from these big companies, we’ll have a better understanding of how they follow the footnote disclosure requirement of ASC 842.

Recap on ASC 842 Leases – Financial Statements Impact

Before we dive into the examples, let’s quickly review the key terms of ASC 842 and the overall impact on the financial statements.

Lease Classification:

  • Operating Leases: Typically follow a consistent expense recognition pattern throughout the lease term, generally utilizing a straight-line approach. 
  • Finance Leases (formerly ‘capital’ leases): Result in a front-loaded expense pattern, where higher expenses are recognized earlier in the lease term due to interest charges.

Balance Sheet Recognition: Unlike ASC 840, where only capital leases were recognized on the balance sheet, ASC 842 mandates recording both an ROU (Right-of-Use) asset and a corresponding lease liability for both lease types. 

  • Right-of-Use (ROU) Asset: Defines the lessee’s right to utilize the leased asset over the lease term. It’s normally classified as a long-lived asset.
  • Lease Liability: Defines the obligation to fulfill remaining lease payments throughout the lease term.

Income Statement Impact: For the operating lease cost, companies typically record a single lease expense, often referred to as “rent expense” or “operating lease expense,” in the general ledger. On the other hand, finance leases are typically separated into interest expense and the amortization of ROU assets.

Cash Flow Statement Implications: Payments related to operating leases are generally recorded under operating activities, whereas finance leases affect both financing and operating activities; payments towards the principal portion of the lease liability are recorded under financing activities, and the payments towards the interest portion are recorded under operating activities.

Related Readings: ASC 842 Cash Flow Statement Example – a Quick Guide

The ASC 842 footnote disclosure relies on the principles of these financial statement impacts. Without further ado, let’s take a look at some examples.

Real-World Examples – ASC 842 Footnote Disclosure

Microsoft

10-K (Annual Report) for the FY ended June 30, 2023

ASC 842 Footnote Disclosure - MSFT 1
ASC 842 Footnote Disclosure - MSFT 2
ASC 842 Footnote Disclosure - MSFT 3

Here are the components of Microsoft’s lease footnote disclosure:

  • Nature of Leases & Remaining Lease Terms: Microsoft stated they have operating and finance leases for various facilities, with a remaining lease term between less than 1 year and 18 years. The renewal option was also mentioned.
  • Lease Cost: Microsoft listed their cost for both operating and finance leases. There is a separate line for finance leases to disclose the amortization cost and interest expense.
  • Cash Flow: Microsoft disclosed two kinds of cash flow information: 1) cash paid regarding the lease liabilities and 2) ROU assets obtained.
  • Balance Sheet: Microsoft listed balance sheet details for operating leases and finance leases.
    • Operating leases: 1) The ROU asset balance and 2) lease liabilities, bifurcated into current portion and non-current portion (presented as “operating lease liabilities”)
    • Finance Leases: 1) The ROU asset balance is presented as the gross balance (Property and equipment, at cost) and the accumulated depreciation balance, leading to the net balance of “Property and equipment.” 2) Lease liabilities bifurcated into current and non-current portions.
  • Weighted Average Remaining Lease Term
  • Weighted Average Discount Rate
  • Lease Payments for each of the subsequent five years and “thereafter” accompanied by imputed interest.
  • Leases signed but not yet commenced. The balance was disclosed along with the timeline.

Apple

10-K (Annual Report) for the FY ended September 30, 2023

Here are the components of Apple’s lease footnote disclosure

  • Nature of Leases & Remaining Lease Terms: Apple stated they have lease arrangements for various facilities and equipment, with a remaining lease term typically less than 10 years. The renewal option was also mentioned.
  • Lease Cost: Apple disclosed the cost of their lease arrangements in a paragraph. The lease cost was grouped by types of payments (fixed vs variable).
  • Cash Flow: Apple disclosed two kinds of cash flow information in a paragraph: 1) cash paid for their fixed and variable payment leases and 2) ROU assets obtained, the latter being a non-cash item.
  • Balance Sheet: Apple listed balance sheet details with two main sections:
    • ROU assets: The table displays values for both operating and finance leases, including the specific line items on the financial statements or balance sheet where they are categorized.
    • Lease liabilities: The table also has numbers for operating and finance leases. The numbers are further bifurcated into current and non-current portions and where they can be located on the balance sheet.
  • Lease Payments for each of the subsequent five years and “thereafter” accompanied by imputed interest.
  • Weighted Average Remaining Lease Term
  • Weighted Average Discount Rate
  • Leases signed but not yet commenced. The balance was disclosed along with the timeline.

Walmart

10-K (Annual Report) for the FY ended January 31, 2023

ASC 842 Footnote Disclosure - Walmart Footnote 7 1

ASC 842 Footnote Disclosure - Walmart FN7 2

  • Nature of Leases: Walmart stated they have leases for various functions such as retail locations, office spaces, land, and equipment both domestically and internationally. Walmart did not state the remaining lease term.
  • Lease Cost: Walmart presented a table that includes operating and finance lease costs. The finance lease costs were separated into two lines: amortization of ROU assets and interest expense. Walmart also disclosed a separate line for “Variable Lease Cost.” 
    • Per ASC 842-20-25-5, Variable Lease Cost represents payments made to the variable components of a lease arrangement outside of the lease liability. Typically, these costs do not depend on an index or a rate, such as real estate taxes, common area maintenance, and insurance premiums.
  • Cash Flow: Walmart also disclosed two kinds of cash flow information in a paragraph: 1) cash paid for both operating leases and finance leases and 2) ROU assets obtained
  • Weighted Average Remaining Lease Term
  • Weighted Average Discount Rate
  • Lease Payments for each of the subsequent five years and “thereafter” accompanied by imputed interest.

Walmart did not disclose additional balance sheet information in the footnote section. However, that’s because they have already done so on the actual balance sheet – see below.

ASC 842 Footnote Disclosure - Walmart Balance Sheet with Lease

This level of disclosure already met the requirement listed in ASC 842-20-45-1. Therefore, additional disclosure may not be necessary in the footnote section.

Walmart did not disclose information on leases that have not yet commenced. According to the requirement outlined in ASC 842-20-50-3, it may not be applicable to Walmart.

Conclusion

We reviewed the footnote disclosure of ASC 842 Lease Accounting from three major public companies. Below are the components found in all of their footnote section.

  • Nature of Leases
  • Lease Costs
  • Cash Flow (including cash payment on leases and the ROU asset acquisition, which is a non-cash item)
  • Weighted Average Remaining Lease Term (here is how to calculate it)
  • Weighted Average Discount Rate

These components align with the typical quantitative requirements outlined in ASC 842-20-50-4.

Apple and Microsoft also included supplemental balance sheet information in the footnote section. Walmart did not have additional disclosure as the information on the balance sheet is sufficient per guidance.

Apple and Microsoft also included information on leases that have not yet commenced. This type of disclosure is typically on an “as applicable” basis.

While the examples provided here offer a glimpse into how companies typically present their footnote disclosures under ASC 842, it’s essential for those directly involved in preparing financial statements and disclosures to conduct a thorough review of the authoritative guidance. This is important because there may be specific disclosure requirements unique to your business that are not commonly addressed elsewhere.

Leave a Reply

Your email address will not be published. Required fields are marked *

Table of Contents