9.1 Overview

This chapter discusses the different steps in a lessor’s accounting for leases. Specifically, Section 9.2 discusses classification of the various lease types and Section 9.3 addresses recognition and measurement considerations related to each of these classifications. Section 9.4 covers other lessor reporting issues. Section 9.5 covers leveraged leases.

As discussed in Chapter 1, the primary objective of the Board’s leasing project was to require presentation of the lessee’s off-balance-sheet liabilities. However, a common misconception is that lessor accounting has not changed much under the new leasing guidance. While it is true that the lessor’s classification and resulting accounting are largely unchanged, there are key differences between ASC 842 and ASC 840 that companies should focus on during their implementation of ASU 2016-02. Specific improvements the Board made to lessor accounting include those to align ASC 842 with (1) enhancements made to its revenue standard, ASU 2014-09 (codified as ASC 606), and (2) updates to key terms related to lessee accounting.

Regarding the alignment with the revenue standard, because lessors’ adoption of ASC 842 was after their adoption of ASC 606, preparers need to establish the timing of changes and how such changes should be reflected. (See Chapter 16 for guidance on the transition provisions of ASC 842.) Further, both the revenue and lease models now underscore the principle of control transfer rather than the transfer of risks and rewards, the latter of which was the principle under ASC 605 and ASC 840.

Although lease classification for lessees under ASC 842 is similar to that for lessors, it is not fully symmetrical. For instance, there are two classes of leases for a lessee and three for a lessor. In addition, because of the amendments made by ASU 2021-05 (see Section 9.2.1.6 for more information), the existence of variable lease payments in a lease sometimes could influence classification for a lessor.

We recommend supplementing a review of this section of the Roadmap with a review of the following chapters:

• Chapter 2, which discusses how to identify whether an arrangement is within the scope of the leasing standard.
• Chapter 3, which discusses whether an arrangement is, or contains, a lease.
• Chapter 4, which discusses how to identify the separate lease components and nonlease components within a contract and how the consideration is allocated to components.
• Chapter 5, which discusses the term over which a lessor recognizes consideration related to the lease component.
• Chapter 6, which discusses the initial and subsequent measurement of consideration that must be allocated to the components identified.

The changes addressed in Chapter 4 are particularly significant for lessors, since they may find the guidance discussed therein challenging to apply and inconsistent with ASC 840. For example, while lessors now have a practical expedient under ASU 2018-11 (see below) to elect not to separate lease and nonlease components, lessors must meet certain conditions to apply such an expedient. Lessors that do not elect the practical expedient must allocate consideration in the contract to the separate lease and nonlease components on a relative stand-alone selling price basis in a manner consistent with ASC 606. This chapter of the Roadmap focuses on the accounting for the lease component and presumes that the lessor has already applied the provisions discussed in Chapter 4.

As noted above, in July 2018, the FASB issued ASU 2018-11, which contains a new practical expedient under which lessors can elect, by class of underlying asset, not to separate lease and nonlease components, provided that the associated nonlease component(s) otherwise would be accounted for under the revenue guidance in ASC 606 and both of the following conditions are met:

• Criterion A — The timing and pattern of transfer for the lease component are the same as those for the nonlease components associated with that lease component.
• Criterion B — The lease component, if accounted for separately, would be classified as an operating lease.

The ASU also clarifies that the presence of a nonlease component that is ineligible for the practical expedient does not preclude a lessor from electing the expedient when the criteria are met for the lease component and any other nonlease component(s). Rather, the lessor would account for the ineligible nonlease component(s) separately from the combined eligible lease and nonlease component(s).

See Section 4.3.3.2 for further details about the practical expedient related to a lessor’s separation of lease and nonlease components. In addition, see Section 15.3.2.4 for the disclosure requirements, and Section 16.4.6 for the transition requirements, related to ASU 2018-11.