The FASB modifies the accounting for certain variable rental leases
The FASB issued a Standard Monday which aims to improve the accounting rules for council leases relating to the accounting by the lessor of certain leases with variable lease payments.
Under the theme 842, Leases, a lessor may be required to recognize a loss of sale at the start of the lease (first day loss) for a sale type lease with variable payments even though the lessor expects the arrangement to be profitable overall.
This accounting result gives rise to financial information which does not accurately represent the underlying economic aspects, whether at the start of the lease or over the term of the lease.
The board has addressed this issue by amending the classification requirements of lessor leases. A lessor is now required to classify and account for a lease with variable payments as an operating lease if:
- The lease would have been classified as a sale type lease or a finance lease; and
- The lessor would otherwise have recognized a loss from the first day.
An overnight loss or gain is not recognized in accounting for operating leases, therefore the FASB expects the resulting financial information to more accurately represent the economic aspects underlying the contract. lease and provide better information to users of financial statements.
– Ken tysiac ([email protected]) is the JofAeditorial director of.