Qualitative Disclosures for the New Lease Accounting Standards: What You Need to Know

Footnote disclosures are a critical component of an entity’s financial reports helping users of the financial statements better understand the entity’s operations, financial results, and significant accounting policies. Most required disclosures have a numbers section and an explanation section, generally referred to as qualitative and quantitative components. Similar to legacy lease accounting, the new lease accounting standards require both quantitative and qualitative disclosures.

The required quantitative disclosures provide information specifically about the lease accounting balances, lease expenses, and lease-related cash flows, among other amounts. These disclosures are drafted by pulling reports from your lease accounting software solution or compiling the information in an Excel spreadsheet.

Qualitative Disclosures

Qualitative disclosures, generally presented in narrative form, aim to provide financial statement users with more information about the significant characteristics and terms of the entity’s overall lease portfolio. Organizations should consider materiality and what information is critical to financial statement users better understanding their application of the new lease accounting standards and the significant judgments or assumptions used. Below we have provided summaries for the information required in the lease accounting footnote disclosures under the FASB, IASB, and GASB.

ASC 842 Requirements

ASC 842-20-50-1 states “the objective of the disclosure requirements is to enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.” Financial statement preparers should use a combination of quantitative and qualitative information to achieve this disclosure objective.

ASC 842 provides a non-comprehensive list of qualitative information for footnote disclosure that includes:

• General descriptions of leases
• The nature and terms of variable lease payments
• Extension and termination options and if/how these are recognized as part of the lease liability and asset balances
• Existence and terms of residual value guarantees
• Restrictions or covenants in lease contracts
• Information about leases that have not yet commenced but result in significant obligations

In addition, qualitative disclosures should provide information about the entity’s policies and significant judgments used in their lease accounting. The types of policies to discuss include, but are not limited to:

• How the entity determines if a contract includes a lease
• Allocations of consideration to lease and non-lease components
• Discount rate methodologies

Finally, financial statement preparers should disclose which practical expedients they have elected, such as the short-term scope exception, the election to not separate lease and non-lease components, and the election to use the risk-free rate instead of the IBR (applicable only for non-public entities).

IFRS 16 Requirements

IFRS 16 paragraph 51 specifies that lease disclosures should include the necessary information to allow “users of financial statements to assess the effect that leases have on the financial position, financial performance and cash flows of the lessee.” In addition to specific quantitative data required for disclosure, IFRS 16 also includes a list of qualitative information preparers should consider for disclosure. This list includes:

• Nature of leasing activities
• Discussion of future cash flows not already reflected in the lease liability balance, such as
  • Variable lease payments
  • Extension and termination options
  • Residual value guarantees
  • Leases that have not yet commenced but the lessee is committed to
• Restrictions and covenants
• Sale and leaseback transactions

If the entity has elected to not account for short-term leases and leases of low-value assets with a lease liability and asset, they must disclose that information in their footnotes.

GASB 87 Requirements

As discussed in GASB Statement No. 34, “the notes to the financial statements should communicate information essential for fair presentation of the financial statements that is not displayed on the face of the financial statements.” GASB Statement No. 87 provides guidance for the type of qualitative disclosures that lessees and lessors should include in their Annual Comprehensive Financial Report (ACFR).

For lessees, the standard states that in addition to the required quantitative financial data entities should also disclose the following qualitative information:

• General description of leasing arrangements
• Discussion of variable payments that are not included in the lease liability measurement
• Existence and terms of residual value guarantees
• Relevant information about other significant transactions (if applicable) including
• Subleases
• Sale-leaseback transactions
• Lease-leaseback transactions

Similarly, lessors should include in the footnotes qualitative information that provides the following:

• General description of leasing arrangements
• Discussion of variable payments that are not included in the lease receivable
• Relevant information about other significant transactions (if applicable) including
• Leases of assets that are investments
• Regulated leases
• Subleases
• Sale-leaseback transactions
• Lease-leaseback transactions

The accounting standard setters intend for qualitative disclosures to be transparent and tailored to each organization’s operations. While qualitative disclosures should not be prescriptive or standardized across organizations, organizations find it helpful to view the annual financial reports for comparative entities that have already adopted their jurisdiction’s new accounting standard as examples.