The Financial Accounting Standards Board (FASB) has released an accounting standards update (ASU) to improve a lessor’s accounting for certain leases with variable lease payments.
The ASU comes after the board received an agenda request that highlighted an issue encountered by lessors during its post-implementation review (PIR) of leases.
Currently, a lessor may be required to recognize a day-one loss for a sales-type lease with variable payments, even if the lessor expects the arrangement to be profitable.
In turn, stakeholders claimed that the accounting outcome results in inaccurate financial reporting that does not represent the “underlying economics” at least commencement or over the lease term.
The FASB’s ASU is intended to amend lessor lease classification requirements in a bid to tackle the inaccuracies.
A lessor is now required to “classify and account for a lease with variable payments as an operating lease if it either would have been classed as a sales-type lease or direct financing lease, or if the lessor would have “otherwise recognized a day-one loss”.
The FASB said: “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.”