# ASC 842-20-55: Leases — Lessee — 55 Implementation Guidance and Illustrations

Source: FASB Accounting Standards Codification, Basic View

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## ASC 842-20-55: 55 Implementation Guidance and Illustrations

[Read section](https://asc.understandingaccounting.org/asc/842/20/#55-implementation-guidance-and-illustrations)

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#### Implementation Guidance

##### [842-20-55-1](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-1)

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A [lessee](https://asc.understandingaccounting.org/glossary/l/#lessee "An entity that enters into a contract to obtain the right to use an underlying asset for a period of time in exchange for consideration.") should recognize costs from [variable lease payments](https://asc.understandingaccounting.org/glossary/v/#variable-lease-payments "Payments made by a lessee to a lessor for the right to use an underlying asset that vary because of changes in facts or circumstances occurring after the commencement date, other than the passage of time.") (in annual periods as well as in interim periods) before the achievement of the specified target that triggers the variable lease payments, provided the achievement of that target is considered [probable](https://asc.understandingaccounting.org/glossary/p/#probable "The future event or events are likely to occur.").

##### [842-20-55-2](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-2)

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Variable lease costs recognized in accordance with paragraph [842-20-55-1](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-1) should be reversed at such time that it is probable that the specified target will not be met.

##### [842-20-55-3](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-3)

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This Subtopic considers the right to control the use of the [underlying asset](https://asc.understandingaccounting.org/glossary/u/#underlying-asset "An asset that is the subject of a lease for which a right to use that asset has been conveyed to a lessee. The underlying asset could be a physically distinct portion of a single asset.") as the equivalent of physical use. If the [lessee](https://asc.understandingaccounting.org/glossary/l/#lessee "An entity that enters into a contract to obtain the right to use an underlying asset for a period of time in exchange for consideration.") controls the use of the underlying asset, recognition of [lease](https://asc.understandingaccounting.org/glossary/l/#lease "A contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.") cost in accordance with paragraph [842-20-25-6(a)](https://asc.understandingaccounting.org/asc/842/20/#842-20-25-6) or amortization of the [right-of-use asset](https://asc.understandingaccounting.org/glossary/r/#right-of-use-asset "An asset that represents a lessee's right to use an underlying asset for the lease term.") in accordance with paragraph [842-20-35-7](https://asc.understandingaccounting.org/asc/842/20/#842-20-35-7) should not be affected by the extent to which the lessee uses the underlying asset.

##### [842-20-55-4](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-4)

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Under certain [leases](https://asc.understandingaccounting.org/glossary/l/#lease "A contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.") (for example, certain equipment leases), a [lessee](https://asc.understandingaccounting.org/glossary/l/#lessee "An entity that enters into a contract to obtain the right to use an underlying asset for a period of time in exchange for consideration.") is legally or contractually responsible for repair and maintenance of the [underlying asset](https://asc.understandingaccounting.org/glossary/u/#underlying-asset "An asset that is the subject of a lease for which a right to use that asset has been conveyed to a lessee. The underlying asset could be a physically distinct portion of a single asset.") throughout the [lease term](https://asc.understandingaccounting.org/glossary/l/#lease-term "The noncancellable period for which a lessee has the right to use an underlying asset, together with all of the following: Periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option Periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option Periods covered by an option to extend (or not to terminate) the lease in which exercise of the option is controlled by the lessor."). Additionally, certain lease agreements include provisions requiring the lessee to make deposits to the [lessor](https://asc.understandingaccounting.org/glossary/l/#lessor "An entity that enters into a contract to provide the right to use an underlying asset for a period of time in exchange for consideration.") to financially protect the lessor in the event the lessee does not properly maintain the underlying asset. Lease agreements often refer to these deposits as maintenance reserves or supplemental rent. However, the lessor is required to reimburse the deposits to the lessee on the completion of maintenance activities that the lessee is contractually required to perform under the lease agreement.

##### [842-20-55-5](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-5)

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Under a typical arrangement, maintenance deposits are calculated on the basis of a performance measure, such as hours of use of the underlying asset, and are contractually required under the terms of the lease agreement to be used to reimburse the lessee for required maintenance of the underlying asset on the completion of that maintenance. The lessor is contractually required to reimburse the lessee for the maintenance costs paid by the lessee, to the extent of the amounts on deposit.

##### [842-20-55-6](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-6)

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In some cases, the total cost of cumulative maintenance events over the term of the lease is less than the cumulative deposits, which results in excess amounts on deposit at the expiration of the lease. In those cases, some lease agreements provide that the lessor is entitled to retain such excess amounts, whereas other agreements specifically provide that, at the expiration of the lease agreement, such excess amounts are returned to the lessee (refundable maintenance deposit).

##### [842-20-55-7](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-7)

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The guidance in paragraphs

[842-20-55-8 through 55-9](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-8)

does not apply to payments to a lessor that are not substantively and contractually related to maintenance of the leased asset. If at the [commencement date](https://asc.understandingaccounting.org/glossary/c/#commencement-date-of-the-lease-commencement-date "The date on which a lessor makes an underlying asset available for use by a lessee. See paragraphs 842-10-55-19842-10-55-20842-10-55-21 for implementation guidance on the commencement date.") a lessee determines that it is less than [probable](https://asc.understandingaccounting.org/glossary/p/#probable "The future event or events are likely to occur.") that the total amount of payments will be returned to the lessee as a reimbursement for maintenance activities, the lessee should consider that when determining the portion of each payment that is not addressed by the guidance in paragraphs

[842-20-55-8 through 55-9](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-8)

.

##### [842-20-55-8](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-8)

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Maintenance deposits paid by a lessee under an arrangement accounted for as a lease that are refunded only if the lessee performs specified maintenance activities should be accounted for as a deposit asset.

##### [842-20-55-9](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-9)

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A lessee should evaluate whether it is probable that an amount on deposit recognized under paragraph [842-20-55-8](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-8) will be returned to reimburse the costs of the maintenance activities incurred by the lessee. When an amount on deposit is less than probable of being returned, it should be recognized in the same manner as variable lease expense. When the underlying maintenance is performed, the maintenance costs should be expensed or capitalized in accordance with the lessee's maintenance accounting policy.

##### [842-20-55-10](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-10)

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The [right-of-use asset](https://asc.understandingaccounting.org/glossary/r/#right-of-use-asset "An asset that represents a lessee's right to use an underlying asset for the lease term.") is a nonmonetary asset while the [lease liability](https://asc.understandingaccounting.org/glossary/l/#lease-liability "A lessee's obligation to make the lease payments arising from a lease, measured on a discounted basis.") is a [monetary liability](https://asc.understandingaccounting.org/glossary/m/#monetary-liability "An obligation to pay a sum of money the amount of which is fixed or determinable without reference to future prices of specific goods and services."). Therefore, in accordance with Subtopic 830-10 on foreign currency matters, when accounting for a [lease](https://asc.understandingaccounting.org/glossary/l/#lease "A contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.") that is denominated in a foreign currency, if remeasurement into the [lessee's](https://asc.understandingaccounting.org/glossary/l/#lessee "An entity that enters into a contract to obtain the right to use an underlying asset for a period of time in exchange for consideration.") functional currency is required, the lease liability is remeasured using the current exchange rate, while the right-of-use asset is remeasured using the exchange rate as of the [commencement date](https://asc.understandingaccounting.org/glossary/c/#commencement-date-of-the-lease-commencement-date "The date on which a lessor makes an underlying asset available for use by a lessee. See paragraphs 842-10-55-19842-10-55-20842-10-55-21 for implementation guidance on the commencement date.").

##### [842-20-55-11](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-11)

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The [lessee](https://asc.understandingaccounting.org/glossary/l/#lessee "An entity that enters into a contract to obtain the right to use an underlying asset for a period of time in exchange for consideration.") should calculate the weighted-average remaining [lease term](https://asc.understandingaccounting.org/glossary/l/#lease-term "The noncancellable period for which a lessee has the right to use an underlying asset, together with all of the following: Periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option Periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option Periods covered by an option to extend (or not to terminate) the lease in which exercise of the option is controlled by the lessor.") on the basis of the remaining lease term and the [lease liability](https://asc.understandingaccounting.org/glossary/l/#lease-liability "A lessee's obligation to make the lease payments arising from a lease, measured on a discounted basis.") balance for each [lease](https://asc.understandingaccounting.org/glossary/l/#lease "A contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.") as of the reporting date.

##### [842-20-55-12](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-12)

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The lessee should calculate the weighted-average discount rate on the basis of both of the following:

1.  a
    
    The [discount rate for the lease](https://asc.understandingaccounting.org/glossary/d/#discount-rate-for-the-lease "For a lessee, the discount rate for the lease is the rate implicit in the lease unless that rate cannot be readily determined. In that case, the lessee is required to use its incremental borrowing rate. For a lessor, the discount rate for the lease is the rate implicit in the lease.") that was used to calculate the lease liability balance for each lease as of the reporting date
    
2.  b
    
    The remaining balance of the [lease payments](https://asc.understandingaccounting.org/glossary/l/#lease-payments "See paragraph 842-10-30-5 for what constitutes lease payments from the perspective of a lessee and a lessor.") for each lease as of the reporting date.

#### Illustrations

##### [842-20-55-13](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-13)

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Example 1 illustrates the assessment of whether a lease is a short-term lease.

##### [842-20-55-14](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-14)

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Lessee has made an accounting policy election not to recognize right-of-use assets and lease liabilities that arise from short-term leases for any class of underlying asset.

##### [842-20-55-15](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-15)

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Lessee enters into a 12-month lease of a vehicle, with an option to extend for another 12 months. Lessee has considered all relevant factors and determined that it is not reasonably certain to exercise the option to extend. Because at lease commencement Lessee is not reasonably certain to exercise the option to extend, the lease term is 12 months.

##### [842-20-55-16](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-16)

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The lease meets the definition of a short-term lease because the lease term is 12 months or less. Consequently, consistent with Lessee's accounting policy election, Lessee does not recognize the right-of-use asset and the lease liability arising from this lease.

##### [842-20-55-17](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-17)

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Example 2 illustrates the determination of the discount rate for the lease.

##### [842-20-55-18](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-18)

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Lessee, a public entity, is the parent of several consolidated subsidiaries. During the current period, 2 subsidiaries entered into a total of 400 individual leases of large computer servers, each with terms ranging between 4 and 5 years and annual payments ranging between $60,000 and $100,000, depending on the hardware capacity of the servers. In aggregate, total lease payments for these leases amount to $30 million.

##### [842-20-55-19](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-19)

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The individual lease contracts do not provide information about the rate implicit in the lease. Lessee is BBB credit rated and actively raises debt in the corporate bond market. Both subsidiaries are unrated and do not actively engage in treasury operations in their respective markets. On the basis of its credit rating and the collateral represented by the leased servers, Lessee's incremental borrowing rate on $60,000 through $100,000 (the range of lease payments on each of the 400 leases) would be approximately 4 percent. Lessee notes that 5-year zero-coupon U.S. Treasury instruments are currently yielding 1.7 percent (a risk-free rate). Because Lessee conducts its treasury operations centrally (that is, at the consolidated group level), it is reasonably assumed that consideration of the group credit standing factored into how each lease was priced.

##### [842-20-55-20](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-20)

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Lessee may determine the discount rate for the lease for the 400 individual leases entered into on different dates throughout the current period by using a portfolio approach. That is, Lessee can apply a single discount rate to the portfolio of new leases. This is because during the period, the new leases are all of similar terms (four to five years), and Lessee's credit rating and the interest rate environment are stable. Because the pricing of the lease is influenced by the credit standing and profile of Lessee rather than the subsidiaries (that is, because Lessee conducts treasury operations for the consolidated group), Lessee concludes that its incremental borrowing rate of 4 percent is an appropriate discount rate for each of the 400 leases entered into by Lessee's 2 subsidiaries during the period. Because Lessee is a public entity, it is not permitted to use a risk-free discount rate.

##### [842-20-55-21](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-21)

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Example 3 illustrates how a lessee would initially and subsequently measure right-of-use assets and lease liabilities and how a lessee would account for a change in the lease term.

##### [842-20-55-22](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-22)

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Lessee enters into a 10-year lease of an asset, with an option to extend for an additional 5 years. Lease payments are $50,000 per year during the initial term and $55,000 per year during the optional period, all payable at the beginning of each year. Lessee incurs initial direct costs of $15,000.

##### [842-20-55-23](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-23)

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Effective as of: not established by retrieval timestamps.


At the commencement date, Lessee concludes that it is not reasonably certain to exercise the option to extend the lease and, therefore, determines the lease term to be 10 years.

##### [842-20-55-24](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-24)

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The rate implicit in the lease is not readily determinable. Lessee's incremental borrowing rate is 5.87 percent, which reflects the fixed rate at which Lessee could borrow a similar amount in the same currency, for the same term, and with similar collateral as in the lease at the commencement date.

##### [842-20-55-25](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-25)

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At the commencement date, Lessee makes the lease payment for the first year, incurs initial direct costs, and measures the lease liability at the present value of the remaining 9 payments of $50,000, discounted at the rate of 5.87 percent, which is $342,017. Lessee also measures a right-of-use asset of $407,017 (the initial measurement of the lease liability plus the initial direct costs and the lease payment for the first year).

##### [842-20-55-26](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-26)

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During the first year of the lease, Lessee recognizes lease expense depending on how the lease is classified. Paragraphs

[842-20-55-27 through 55-30](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-27)

illustrate the lease expense depending on whether the lease is classified as a finance lease or as an operating lease.

##### [842-20-55-27](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-27)

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Lessee depreciates its owned assets on a straight-line basis. Therefore, the right-of-use asset would be amortized on a straight-line basis over the 10-year lease term. The lease liability is increased to reflect the Year 1 interest on the lease liability in accordance with the interest method. As such, in Year 1 of the lease, Lessee recognizes the amortization expense of $40,702 ($407,017 ÷ 10) and the interest expense of $20,076 (5.87% × $342,017).

##### [842-20-55-28](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-28)

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At the end of the first year of the lease, the carrying amount of Lessee's lease liability is $362,093 ($342,017 + $20,076), and the carrying amount of the right-of-use asset is $366,315 ($407,017 - $40,702).

##### [842-20-55-29](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-29)

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Lessee determines the cost of the lease to be $515,000 (sum of the lease payments for the lease term and initial direct costs incurred by Lessee). The annual lease expense to be recognized is therefore $51,500 ($515,000 ÷ 10 years).

##### [842-20-55-30](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-30)

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At the end of the first year of the lease, the carrying amount of Lessee's lease liability is $362,093 ($342,017 + $20,076), and the carrying amount of the right-of-use asset is $375,593 (the carrying amount of the lease liability plus the remaining initial direct costs, which equal $13,500).

##### [842-20-55-31](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-31)

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At the end of Year 6 of the lease, Lessee makes significant leasehold improvements. Those improvements are expected to have significant economic value for Lessee at the end of the original lease term of 10 years. The improvements result in the underlying asset having greater utility to Lessee than alternative assets that could be leased for a similar amount and that are expected to have significant economic life beyond the original lease term. Consequently, construction of the leasehold improvements is deemed a significant event or significant change in circumstances that directly affects whether Lessee is reasonably certain to exercise the option to extend the lease and triggers a reassessment of the lease term. Upon reassessing the lease term, at the end of Year 6, Lessee concludes that it is reasonably certain to exercise the option to extend the lease for five years. Taking into consideration the extended remaining lease term, Lessee's incremental borrowing rate at the end of Year 6 is 7.83 percent. As a result of Lessee's remeasuring the remaining lease term to nine years, Lessee also would remeasure any variable lease payments that depend on an index or a rate; however, in this Example, there are no variable lease payments that depend on an index or a rate. In accordance with paragraph [842-10-25-1](https://asc.understandingaccounting.org/asc/842/10/#842-10-25-1), Lessee reassesses the lease classification as a result of the change in the lease term. Assume for purposes of this Example that the reassessment does not change the classification of the lease from that determined at the commencement date.

##### [842-20-55-32](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-32)

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At the end of Year 6, before accounting for the change in the lease term, the lease liability is $183,973 (present value of 4 remaining payments of $50,000, discounted at the rate of 5.87 percent). Lessee's right-of-use asset is $162,807 if the lease is classified as a finance lease or $189,973 if the lease is classified as an operating lease (the balance of the remeasured lease liability at the end of Year 6 plus the remaining initial direct costs of $6,000).

##### [842-20-55-33](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-33)

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Lessee remeasures the lease liability, which is now equal to the present value of 4 payments of $50,000 followed by 5 payments of $55,000, all discounted at the rate of 7.83 percent, which is $355,189. Lessee increases the lease liability by $171,216, representing the difference between the remeasured liability and its current carrying amount ($355,189 - $183,973). The corresponding adjustment is made to the right-of-use asset to reflect the cost of the additional rights.

##### [842-20-55-34](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-34)

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Following the adjustment, the carrying amount of Lessee's right-of-use asset is $334,023 if the lease is a finance lease (that is, $162,807 + $171,216) or $361,189 if the lease is an operating lease (that is, $189,973 + $171,216).

##### [842-20-55-35](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-35)

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Lessee then makes the $50,000 lease payment for Year 7, reducing the lease liability to $305,189 ($355,189 - $50,000), regardless of how the lease is classified.

##### [842-20-55-36](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-36)

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Lessee recognizes lease expense in Year 7 as follows, depending on how the lease had been classified at the commencement date.

##### [842-20-55-37](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-37)

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Lessee depreciates its owned assets on a straight-line basis. Therefore, the right-of-use asset will be amortized on a straight-line basis over the lease term. The lease liability will be reduced in accordance with the interest method. As such, in Year 7 (the first year following the remeasurement), Lessee recognizes amortization expense of $37,114 ($334,023 ÷ 9) and interest expense of $23,896 (7.83% × $305,189).

##### [842-20-55-38](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-38)

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Lessee determines the remaining cost of the lease as the sum of the following:

1.  a
    
    The total lease payments, as adjusted for the remeasurement, which is the sum of $500,000 (10 payments of $50,000 during the initial lease term) and $275,000 (5 payments of $55,000 during the term of the lease extension); plus
    
2.  b
    
    The total initial direct costs attributable to the lease of $15,000; minus
    
3.  c
    
    The periodic lease cost recognized in prior periods of $309,000.

##### [842-20-55-39](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-39)

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The amount of the remaining cost of the lease is therefore $481,000 ($775,000 + $15,000 - $309,000). Consequently, Lessee determines that the annual expense to be recognized throughout the remainder of the lease term is $53,444 ($481,000 ÷ the remaining lease term of 9 years).

##### [842-20-55-40](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-40)

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Example 4 illustrates how a lessee would recognize lease cost in an operating lease and initially and subsequently measure right-of-use assets and lease liabilities for that lease.

##### [842-20-55-41](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-41)

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Lessee enters into a 10-year lease for 5,000 square feet of office space. The annual lease payment is $10,000, paid in arrears, and increases 5 percent each year during the lease term. Lessee's incremental borrowing rate at lease commencement is 6 percent. Lessee classifies the lease as an operating lease in accordance with paragraphs

[842-10-25-2 through 25-3](https://asc.understandingaccounting.org/asc/842/10/#842-10-25-2)

. Lessee incurs initial direct costs of $5,000.

##### [842-20-55-42](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-42)

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At the commencement date, Lessee receives a $10,000 cash payment from Lessor that Lessee accounts for as a lease incentive. Lessee measures the lease liability at the present value of the 10 remaining lease payments ($10,000 in Year 1, increasing by 5 percent each year thereafter), discounted at the rate of 6 percent, which is $90,434. Lessee also measures a right-of-use asset of $85,434 (the initial measurement of the lease liability + the initial direct costs of $5,000 - the lease incentive of $10,000).

##### [842-20-55-43](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-43)

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During the first year of the lease, Lessee determines the remaining cost of the lease as the sum of the following:

1.  a
    
    The total lease payments of $115,779 (the sum of the 10 escalating payments to Lessor during the lease term of $125,779 − the lease incentive paid to Lessee at the commencement date of $10,000)
    
2.  b
    
    The total initial direct costs attributable to the lease of $5,000.
    

The amount of the remaining lease cost is therefore $120,779 ($115,779 + $5,000). Consequently, Lessee determines that the single lease cost to be recognized every year throughout the lease term is $12,078 ($120,779 ÷ 10 years). This assumes that there are no remeasurements of the lease liability or modifications to the lease throughout the lease term.

##### [842-20-55-44](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-44)

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At the end of Year 1, the carrying amount of the lease liability is $85,860 (9 remaining lease payments, discounted at the rate of 6 percent), and the carrying amount of the right-of-use asset is the amount of the liability, adjusted for the following:

1.  a
    
    Accrued lease payments of $2,578 (the amount of payments to Lessor to be recognized as part of the single lease cost each year during the lease of $12,578 \[total payments to Lessor of $125,779 ÷ 10 years\] − the first year's lease payment of $10,000)
    
2.  b
    
    Unamortized initial direct costs of $4,500 (gross initial direct costs of $5,000 - amounts recognized previously as part of the single lease cost of $500 \[total initial direct costs of $5,000 ÷ 10 years\])
    
3.  c
    
    The remaining balance of the lease incentive of $9,000 (gross lease incentive of $10,000 - amounts recognized previously as part of the single lease cost of $1,000 \[total lease incentives of $10,000 ÷ 10 years\]).
    

Therefore, at the end of Year 1, Lessee measures the right-of-use asset at the amount of $78,782 ($85,860 - $2,578 + $4,500 - $9,000).

##### [842-20-55-45](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-45)

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At the beginning of Year 2, Lessee determines the remaining cost of the lease to be $108,701 (the total lease payments of $115,779 + the total initial direct costs of $5,000 - the single lease cost recognized in Year 1 of $12,078). The single lease cost to be recognized in Year 2 is still $12,078 ($108,701 ÷ 9 years). For the purposes of the Example, only the first two years' determination of the single lease cost are shown. However, the single lease cost will be determined in the same way as in Years 1 and 2 for the remainder of the lease and, in this Example, will continue to equal $12,078 every period for the remainder of the lease term assuming that there are no remeasurements of the lease liability or modifications to the lease.

##### [842-20-55-46](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-46)

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At the end of Year 2, the carrying amount of the lease liability is $80,511, and the carrying amount of the right-of-use asset is $71,855 (the carrying amount of the lease liability of $80,511 - the accrued lease payments of $4,656 + the unamortized initial direct costs of $4,000 - the remaining balance of the lease incentive received of $8,000). For the purposes of the Example, the subsequent measurement of the lease liability and the subsequent measurement of the right-of-use asset are shown only for the first two years. However, Lessee will continue to measure the lease liability and the right-of-use asset for this lease in the same manner throughout the remainder of the lease term.

##### [842-20-55-47](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-47)

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Example 5 illustrates impairment of a right-of-use asset.

##### [842-20-55-48](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-48)

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Lessee enters into a 10-year lease of a nonspecialized asset. Lease payments are $10,000 per year, payable in arrears. The lease does not transfer ownership of the underlying asset or grant Lessee an option to purchase the underlying asset. At lease commencement, the remaining economic life of the underlying asset is 50 years, and the fair value of the underlying asset is $600,000. Lessee does not incur any initial direct costs as a result of the lease. Lessee's incremental borrowing rate is 7 percent, which reflects the fixed rate at which Lessee could borrow the amount of the lease payments in the same currency, for the same term, and with similar collateral as in the lease at commencement. The lease is classified as an operating lease.

##### [842-20-55-49](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-49)

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Effective as of: not established by retrieval timestamps.


At the commencement date, Lessee recognizes the lease liability of $70,236 (the present value of the 10 lease payments of $10,000, discounted at the rate of 7 percent). Lessee also recognizes a right-of-use asset of $70,236 (the initial measurement of the lease liability). Lessee determines the cost of the lease to be $100,000 (the total lease payments for the lease term). The annual lease expense to be recognized is therefore $10,000 ($100,000 ÷ 10 years).

##### [842-20-55-50](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-50)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:56:58.743Z to 2026-09-10T01:56:58.743Z

Record version: sha256:7974125da56a59dd5f7535b8aa3b7da98eef9edc1e81bc8e4ad670fe89f75b7f

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Effective as of: not established by retrieval timestamps.


At the end of Year 3, when the carrying amount of the lease liability and the right-of-use asset are both $53,893, Lessee determines that the right-of-use asset is impaired in accordance with Section 360-10-35 and recognizes an impairment loss of $35,000. The right-of-use asset is part of an asset group that Lessee tested for recoverability because of a significant adverse change in the business climate that affects Lessee's ability to derive benefit from the assets within the asset group. The portion of the total impairment loss for the asset group allocated to the right-of-use asset in accordance with paragraph [360-10-35-28](https://asc.understandingaccounting.org/asc/360/10/#360-10-35-28) is $35,000. After the impairment charge, the carrying amount of the right-of-use asset at the end of Year 3 is $18,893 ($53,893 - $35,000). Because of the impairment, the total expense recognized in Year 3 is $45,000 ($10,000 in lease expense + the $35,000 impairment charge). Beginning in Year 4, and for the remainder of the lease term, the single lease cost recognized by Lessee in accordance with paragraphs [842-20-25-6(a)](https://asc.understandingaccounting.org/asc/842/20/#842-20-25-6) and [842-20-25-7](https://asc.understandingaccounting.org/asc/842/20/#842-20-25-7) will equal the sum of the following:

1.  a
    
    Amortization of the right-of-use asset remaining after the impairment ($18,893 ÷ 7 years = $2,699 per year)
    
2.  b
    
    Accretion of the lease liability. For example, in Year 4, the accretion is $3,773 ($53,893 × 7%) and, in Year 5, the accretion is $3,337 ($47,665 × 7%).

##### [842-20-55-51](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-51)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:56:58.743Z to 2026-09-10T01:56:58.743Z

Record version: sha256:46ce93e45d23609768c9bb38d18424767f7841507ea3edeea8b57cb26d1169e2

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


Consequently, at the end of Year 4, the carrying amount of the lease liability is $47,665 (that is, calculated as either the present value of the remaining lease payments, discounted at 7 percent, or the previous balance of $53,893 - $10,000 Year 4 lease payment + the $3,773 accretion of the lease liability). The carrying amount of the right-of-use asset is $16,194 (the previous balance of $18,893 - $2,699 amortization). Lessee measures the lease liability and the right-of-use asset in this manner throughout the remainder of the lease term.

##### [842-20-55-52](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-52)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:56:58.743Z to 2026-09-10T01:56:58.743Z

Record version: sha256:b6cdda5987051b381ec2cadd91e2bd2ebcd2efe6c8f5c04ed11cb3467e0b7a0b

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


Example 6 illustrates how a lessee may meet the quantitative disclosure requirements in paragraph [842-20-50-4](https://asc.understandingaccounting.org/asc/842/20/#842-20-50-4).

##### [842-20-55-53](https://asc.understandingaccounting.org/asc/842/20/#842-20-55-53)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:56:58.743Z to 2026-09-10T01:56:58.743Z

Record version: sha256:006e840b2a37be96896f23d47bf870432bed70171d68ec8c96670857f89ab681

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


The following Example illustrates how a lessee may meet the quantitative disclosure requirements in paragraph [842-20-50-4](https://asc.understandingaccounting.org/asc/842/20/#842-20-50-4).

-   ![ ](https://asc.understandingaccounting.org/asc-img/GUID-A36B10C9-C8FC-424E-A406-F2DF6D2A1AE0-low.gif)
    
    "Year Ending December 31," 20X2 20X1 Lease cost Finance lease cost: $XXX $XXX Amortization of right-of-use assets XXX XXX Interest on lease liabilities XXX XXX Operating lease cost XXX XXX Short-term lease cost XXX XXX Variable lease cost XXX XXX Sublease income (XXX) (XXX) Total lease cost $XXX $XXX Other information "(Gains) and losses on sale and leaseback transactions, net" $(XXX) $XXX Cash paid for amounts included in the measurement of lease liabilities XXX XXX Operating cash flows from finance leases XXX XXX Operating cash flows from operating leases XXX XXX Financing cash flows from finance leases XXX XXX Right-of-use assets obtained in exchange for new finance lease liabilities XXX XXX Right-of-use assets obtained in exchange for new operating lease liabilities XXX XXX Weighted-average remaining lease term—finance leases X.X years X.X years Weighted-average remaining lease term—operating leases X.X years X.X years Weighted-average discount rate—finance leases X.X% X.X% Weighted-average discount rate—operating leases X.X% X.X%