The Financial Accounting Standards Board (FASB) issued a lease accounting guidance update for lessors related to certain leases with variable lease payments.
Under the original guidance in ASC 842, lessors may be required to recognize a day-one loss at lease commencement for a sales-type lease with variable payments even if the lease is expected to produce a profit overall. The FASB received feedback that this day-one loss did not faithfully represent the underlying economics of the transaction, and users of the financial statements were not receiving useful information from sales-type accounting treatment.
In response to these concerns, the FASB decided to amend lessor lease classification guidance. The FASB said in a press release that “a lessor is now required to classify and account for a lease with variable payments as an operating lease if (a) the lease would have been classified as a sales-type lease or a direct financing lease and (b) the lessor would have otherwise recognized a day-one loss.”
Operating lease accounting does not produce a day-one loss, so the change improves financial reporting for this type of lease arrangement by more accurately reflecting the economics of the transaction.
CoStar offers lessor accounting solutions for corporate and retail tenants, including lessor functionality. Many companies become lessors even when leasing assets for income is not part of the core business model. This often takes the form of a sublease, an outparcel lease, or a lease to assist customers or franchisees. CoStar customers account for the full lifecycle of lessor operating leases within the application, including lease abstract, accounts receivable, lease accounting journal entries, and financial reporting.
The entire Accounting Standards Update can be found on the FASB website. To learn more about CoStar lease accounting software and to understand the many ways it stands far above the competition, read Why Lease Accounting Software Systems Fail.