Shifting application from an individual lease to a portfolio level offers practicality and cost minimization for companies adopting FASB's new lease accounting standard. Here are tips for applying a portfolio approach:
Assess the lease population. Materiality and volume are key characteristics of a lease population. Material individual leases are often specifically identifiable and have established data collection and governance processes. Examples are offices, stores, airplanes, or data centers. Depending on how a contract is executed, a single lease agreement may contain multiple identified leased assets, such as floors in a building or capacity in a data center. These types of leasing agreements benefit from existing processes and are favorably positioned to apply the guidance at a lease, or contract, level. However, immaterial individual lease agreements, such as copiers, vehicles, and laptops, may not have robust processes because of the historic, off-balance-sheet accounting treatment. These types of lease agreements may have high volumes, which introduces additional operational complexity. Low-dollar, high-volume leasing agreements could benefit from the option to group leases into portfolios.
Determine eligibility. The one requirement of the portfolio approach is that the accounting results under the elected option must not materially differ from a lease-level application. If this criterion is not met, forgoing the portfolio approach election would mean forgoing certain operational advantages, such as discount rate simplification. Under the portfolio approach, companies are permitted to apply a single discount rate to all leases within the portfolio. Alternatively, the discount rate would have to be individually derived and applied to each lease. The efficiency offered by the portfolio approach is especially compelling for companies with high-volume lease
Define the portfolio. One method for defining a portfolio is to group leases of contractually similar assets. Take, for...