Lessor issues: Implementing the new leases accounting standard

Lessors’ accounting for leases is substantially unchanged by the new leases Accounting Standard Update No. 2016-02 (ASC 842). However, there are some relevant changes lessors should take note of.

Definitions

• Lessor: An entity that enters into a contract to provide the right to use an underlying asset for a period of time in exchange for consideration.
• Underlying asset: An asset that is subject to the lease for which a right to use has been conveyed to the lessee. The underlying asset could be a physically distinct portion of a single asset.

Lease classification

There are no substantive changes for lessors with respect to lease classification. Lessors will still classify leases as operating, sales-type or finance type leases. The classification criteria is the same as for lessees, as follows:

A lessor shall classify a lease as a sales-type lease if any of the following criteria is met:

• The lease transfers ownership of the underlying asset to the lessee by the end of the lease term.
• The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise.
• The lease term is for the major part of the remaining economic life of the underlying asset. However, if the commencement date falls at or near the end of the economic life of the underlying asset, this criterion shall not be used for purposes of classifying the lease.
• The present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments in accordance with paragraph 842-10-30-5(f) equals or exceeds substantially all of the fair value of the underlying asset.