FASB, Accounting Standard Update, ASU, Leases, Variable Lease Payments
Tax & AccountingJuly 19, 2021

FASB Issues ASU on Improving Lessor Accounting for Leases with Variable Lease Payments

By: CCH ARM Editorial

FASB Issues ASU on Improving Lessor Accounting for Leases with Variable Lease Payments

The FASB has issued Accounting Standards Update (ASU) 2021-05, Leases (Topic 842), Lessors—Certain Leases with Variable Lease Payments. The guidance in ASU 2021-05 is intended to improve an area of the guidance under Topic 842, Leases, related to a lessor’s accounting for certain leases with variable lease payments.

Purpose of Amendments

The FASB adopted Topic 842 in February 2016, and the FASB is in the process of conducting a post-implementation review of the standard. In the course of this post-implementation review, the FASB received an agenda request highlighting an issue encountered by lessors. Under Topic 842, a lessor may be required to recognize a selling loss at lease commencement (day-one loss) for a sales-type lease with variable payments, even if the lessor expects the arrangement will be profitable overall. Stakeholders advised that this accounting outcome results in financial reporting that does not faithfully represent the underlying economics either at lease commencement or over the lease term. Therefore, users of financial statements are not being provided with information for those transactions that is decision-useful.

Amendments to Leases Standard by ASU 2021-05

To address this issue, the FASB is amending the lessor lease classification requirements. These amendments require a lessor to classify and account for a lease with variable payments as an operating lease if:

  • The lease would have been classified as a sales-type lease or a direct financing lease in accordance with the classification criteria in paragraphs 842-10-25-2 through 25-3; and
  • The lessor would have otherwise recognized a day-one loss.

A day-one loss or profit is not recognized under operating lease accounting. The resulting financial reporting is expected to more faithfully represent the economics underlying the lease and improve the decision usefulness of information provided to the users of financial statements.

Effective Dates

Subject to certain transition requirements, the ASU 2021-05 amendments are effective for fiscal years beginning after December 15, 2021, for all entities, and for interim periods within those fiscal years for public business entities and interim periods within fiscal years beginning after December 15, 2022, for all other entities.

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