A July 19 US accounting standards update from the Financial Accounting Standards Board (FASB) revises guidance related to a lessor’s accounting for certain leases with variable lease payments.
The change is intended to address an issue where a lessor may be required to recognize a selling loss at lease commencement for sales-type leases with variable payments even if the lessor expects the arrangement will be profitable overall. Critics of the rule have contended that this treatment fails to accurately represent the economics of the transaction either at the beginning of the lease or over its term.
To address the concerns, the accounting standard update changes the lessor lease classification requirements. Under the update, in certain circumstances, lessors classify a lease with variable payments as an operating lease – under which no loss or profit is recognized on day one. This rule applies if the lease would have been classified as a sales-type lease or a direct financing lease and the lessor would have otherwise recognized a loss on day one.
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