FASB alters accounting for certain leases with variable lease payments

FASB issued a standard Monday that is designed to improve the board’s lease accounting rules related to a lessor’s accounting for certain leases with variable lease payments.

Under Topic 842, Leases, a lessor may 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 that the arrangement will be profitable overall.

This accounting outcome results in financial reporting that does not accurately represent the underlying economics either at lease commencement or over the lease term.

The board addressed this issue by amending lessor lease classification requirements. A lessor now is required to classify and account for a lease with variable payments as an operating lease if:

• The lease would have been classified as a sales-type lease or a direct financing lease; and
• The lessor would have otherwise recognized a day-one loss.

A day-one loss or profit is not recognized under accounting for operating leases, therefore FASB expects that the resulting financial reporting would more accurately represent the economics underlying the lease and provide better information to users of financial statements.

— Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA’s editorial director.