9.1 Overview
ASC 842-30
05-1 This Subtopic addresses accounting
by lessors for leases that have been classified as sales-type leases, direct
financing leases, or operating leases in accordance with the requirements in
Subtopic 842-10. Lessors should follow the requirements in this Subtopic as well
as those in Subtopic 842-10.
15-1 This Subtopic follows the same
Scope and Scope Exceptions as outlined in the Overall Subtopic; see Section
842-10-15.
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 ASC 842. 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. 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:
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Chapter 2, which discusses how to identify whether an arrangement is within the scope of the leasing standard.
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Chapter 3, which discusses whether an arrangement is, or contains, a lease.
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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.
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Chapter 5, which discusses the term over which a lessor recognizes consideration related to the lease component.
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Chapter 6, which discusses the initial and subsequent measurement of consideration that must be allocated to the components identified.
In July 2018, the FASB issued ASU 2018-11, which contains a new practical
expedient in ASC 842-10-15-42A under which lessors can elect, by class of underlying asset,
not to separate lease and nonlease components if certain criteria are met. See Section 4.3.3.2 for further details
about the practical expedient related to a lessor’s separation of lease and nonlease
components.
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 focuses on
the accounting for the lease component and presumes that the lessor has already applied the
provisions (separation and allocation) discussed in Chapter
4.
In accounting for leases, it is important for an entity to determine
whether a lessor is combining or separating lease and nonlease components. There are many
differences between the accounting for a lease component under ASC 842 and that for a
nonlease component under another Codification topic (e.g., differences related to the
treatment of variable lease payments).
Connecting the Dots
Variable Consideration
While there are conceptual consistencies between ASC 606 and ASC 842,
principally with respect to their reliance on control transfer, the two standards
sometimes differ in their recognition and measurement principles. For example, under ASC
606, variable payments are estimated and included in the transaction price subject to a
constraint; under ASC 842, however, variable lease payments not linked to an index or
rate are generally excluded from the determination of a lessor’s lease receivable.
Variable consideration may be allocated in a contract to a lease component (recognition
governed by ASC 842) and a nonlease component (recognition most likely governed by ASC
606 — see below). In paragraph BC163 of ASU
2016-02, the FASB addresses its decisions regarding the differences
between accounting for variable payments under ASC 842 and accounting for variable
consideration under ASC 606:
The Board decided that providing guidance on consideration in the
contract was necessary to ensure consistent application of the allocation guidance
in Topic 842, particularly for lessors because of the differences between how the
Board decided a lessor should account for variable lease payments and how an entity
accounts for variable consideration in Topic 606. The Board concluded that
accounting for a variable payment that relates partially to a lease component (for
example, a performance bonus that relates to the leased asset and the lessor’s
operation of that asset) in the same manner as a variable lease payment (that is,
with respect to recognition and measurement) will be less costly and complex than
accounting for that variable payment in accordance with the variable consideration
guidance in Topic 606.
Because an entity may be permitted to recognize revenues under ASC 606
earlier than revenues generated from lease components, it is critical to determine the
allocation of the consideration to the appropriate component. See Section 4.4.2.2.1 for more
information.