FASB Updates Leases Standard for Variable Lease Payments

The Financial Accounting Standards Board released an accounting standards update to help lessors account for leases with variable lease payments.

The accounting standards update amends the lease classification requirements for lessors so they aren’t required to recognize a loss upfront at the start of a sales-type lease if they eventually expect to make a profit.

The leases standard puts leases on the balance sheet for the first time at many companies. Public companies were supposed to begin implementing the standard in 2019, but FASB has delayed the standard twice for private companies and nonprofits because of the complexities that have arisen for companies and the pandemic until 2022.

During FASB’s post-implementation review of the leasing standard, often referred to as Topic 842 or ASC 842 under FASB’s Accounting Standards Codification, FASB heard some complaints about the issue. Under the original requirements, a lessor could be required to recognize a selling loss at lease commencement (day-one loss) for a sales-type lease with variable payments even if the lessor expects the arrangement will be profitable overall.

Constituents pointed out that could lead to financial reporting that doesn’t faithfully represent the underlying economics either at the start of the lease or over the term of the lease. The new update amends the lease classification requirements so lessors are now required to classify and account for a lease with variable payments as an operating lease if (a) the lease would have been classified as a sales-type lease or a direct financing lease and (b) the lessor would have otherwise recognized a day-one loss. A day-one loss or profit isn’t recognized under operating lease accounting.

“The resulting financial reporting is expected to more faithfully represent the economics underlying the lease and improve the decision usefulness of information provided to the users of financial statements,” said FASB.

FASB made the decision at a meeting in April to change the accounting (see story), but the ASU wasn’t issued until Monday

(Source:  AccountingToday – Daily Briefing – July 20, 2021)