Accounting Research Tool

19-1, Assessing the Collectibility of Operating Lease Receivables (July 1, 2019)

Financial Reporting Alert 19-1
July 1, 2019
Image cannot be displayed

Assessing the Collectibility of Operating Lease Receivables

While adopting ASC 842,1 lessors have raised questions about the appropriate accounting for operating lease receivables recognized by a lessor that are or are expected to become impaired since they are excluded from the scope of the new impairment guidance in ASC 326.2 On the basis of a technical inquiry with the FASB staff, we understand the following:
  • The application of the guidance in ASC 842-30 requiring an assessment of the probability of an individual customer’s (tenant’s) future payment is mandatory.
  • A lessor may elect to supplement the ASC 842-30 guidance with the use of a general or portfolio reserve approach (aligned with the legacy application of ASC 450-20).
  • If a lessor elects to record a general reserve, the income statement impact may be recorded as a reduction to lease income or as bad-debt expense.
  • Given the expected diversity in practice, consistent application and transparent disclosure of the policy elected are critical.