FASB Further Clarifies Accounting for Impairment of Operating Lease Receivables
On July 17, 2019, the FASB discussed, in a non-decision-making meeting, accounting for impairment of operating lease receivables.1 Stakeholders had initially raised the issue to the FASB through a technical inquiry. As indicated in its meeting handout, the Board agreed with the FASB staff’s view that the following two methods to account for the impairment of operating lease receivables were acceptable:
- Method 1: Impairment Recognized Only at the Individual Lease Level — “[A] lessor would apply a strict interpretation of [ASC] 842-30-25-12 [and] 25-13 and account for the impairment of operating leases solely at the individual lease level. At lease commencement and subsequently, . . . if collectibility [at the individual lease level] is not considered probable,” the lessor recognizes lease revenue for that individual lease on a cash basis. If collectibility is probable, a full accrual method (e.g., a straight-line receivable is recognized) is used and no allowance or bad debt expense is recognized. In addition, under this method, cumulative revenue recognized should always equal cash received.
- Method 2: A General Allowance in Accordance With ASC 450 Is Recognized in Conjunction With the Guidance in ASC 842-30 — “[A] lessor would analyze each of its operating leases at the individual level” in a manner consistent with Method 1. “For a portfolio of operating leases that are individually considered collectible but for which the lessor estimates that a portion ultimately will be uncollectible, a general allowance may be established and maintained in accordance with Topic 450.” Under this method, the FASB explains the following in its meeting handout: Broadly, the staff thinks that it is acceptable for the general reserve accounting for operating lease receivables to be consistent with that currently applied for trade receivables (before Topic 326 becomes effective), as long as a lessor ceases recognizing lease revenue on a straight-line basis for an individual lease when collectibility no longer is probable for that lease.
See the FASB’s meeting handout and summary of the Board's discussion for additional information. Also refer to Deloitte’s July 1, 2019, Financial Reporting Alert for more comprehensive interpretive guidance on the issue.
Note that operating lease receivables are not within the scope of FASB Accounting Standards Codification (ASC) Topic 326, Financial Instruments — Credit Losses.
For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s “Titles of Topics and Subtopics in the FASB Accounting Standards Codification.”