The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) 842 with several subsequent accounting standards updates spanning from 2016 to the present. For fiscal years beginning after December 15, 2021, private companies are required to adopt and implement ASC 842.
Key changes for the lessor
- Changes to test for lease classification (i.e. sales-type leases vs. direct financing leases vs. operating leases).
- Removal of the requirement for a sales-type lease to have a selling profit or loss. Additional collectability considerations upon lease commencement.
- Changes could result in a selling profit or loss for direct-financing leases. However, the profit is deferred, while the loss is recognized upon lease commencement.
- Revenue recognition considerations for leases with significant variable lease payments (i.e. percentage of sales, lease usage, etc.).
- Variable lease payments are recorded as income in the period in which the changes in facts and circumstances on which the variable lease payments are based.
- Treatment of initial direct costs associated with entering into a lease (i.e. commissions, legal costs, etc.).
- Costs that are contingent on the lease being signed, capitalized and amortized over the life of the lease term. All other costs are expensed as incurred.
- Treatment of revenue recognition with the collectability of lease payments is not probable.
- When lease payments are deemed not probable, rent should be recognized when received. There is an impact to the associated deferred rent of such lease payments.
- Presentation of lease payments in profit and loss.
- Variable lease payments mirror the presentation and treatment of ASC 606.
- Note: There is a practical expedient that may nullify this change with disclosure considerations.
- Updates to required disclosures.
- General nature of a company’s leases.
- Significant judgments made in applying ASC 842.
- The amounts recognized in the financial statements relating to leases.
While the focus around ASC 842 has been primarily on the impact to lessees, most prominently with the changes to the balance sheet, there are impacts to the lessor (landlords) that need to be evaluated and considered for 2022. In addition, real estate assets encumbered by a ground lease require a review of both the lessor and lessee impacts of ASC 842. Due to the significance of the impact to the lessee there may be requests made to the lessor regarding lease language and economics.
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The information provided here is for general guidance only, and does not constitute the provision of tax advice, accounting services, investment advice, legal advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisers.