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.