Why does my ASC 842 Footnote disclosure for Cash Flows not equal Cash columns in the Amortization Schedule?
The ASC 842 footnote disclosure for cash flows reflects only the cash paid that reduces lease liabilities—matching the sum of the amortization schedule’s operating and financing lease liability payments (columns J & K)—and excludes other cash outflows such as initial direct costs (investing activities) and lease prepayments, which may be classified either as investing activities or consistent with post-commencement lease payments per KPMG guidance.
Per ASC 842-20-50-4(g)(1):
“Cash paid for amounts included in the measurement of lease liabilities, segregated between operating and financing cash flows.”
The footnote disclosure calculates the cash payments that have reduced the lease liability. This amount will equal the sum of columns J & K in the Amortization Schedule.
Other payments that are not included in this disclosure are:
- Initial Direct Costs: These are cash outflows for investing activities.
- Prepayments: According to the KPMG Handbook on Cash Flows (see 14.2.60), there are two options for prepayments (payments/incentives received on or before the commencement date), which should be disclosed and consistently applied:
- Option 1: Cash outflows for investing activities. Payments are made to acquire the productive ROU asset.
- Option 2: Classify lease prepayments in the same manner it expects to classify lease payments made after lease commencement.