ASC 842: Financial Statement Presentation and Disclosure Requirements of the Lessor

By Brett Sinsabaugh, Business Assurance and Advisory Services Senior Manager 

Update: On Wednesday, June 3, 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2020-05, which granted a one-year delay on the required implementation dates of the new lease and revenue recognition standards for certain entities.

What Are The Financial Statement Presentation And Disclosure Requirements Of The Lessor Under ASC 842?

In February 2016, the Financial Accounting Standards Board issued new guidance over leases, Accounting Standards Update 2016-02: Leases (Topic 842), (“ASC 842”). ASC 842 requires that all leasing activity with initial terms in excess of twelve months be recognized on the balance sheet with a right of use asset and a lease liability. The standard will require entities to classify leases as either a finance, or operating lease based upon the contractual terms.

Once adopted, entities should be aware of the financial statement presentation and disclosure requirements.   The information below is presented to assist in the understanding of financial statement presentation and disclosure requirements for lessors.

Financial Statement Presentation Matters For Lessors Who Have Adopted ASC 842

*The following content comes directly from FASB guidance on disclosures requirements for Lessors under ASC 842. 

Sales-Type and Direct Financing Leases

• Statement of Financial Position

  • A lessor shall present lease assets (that is, the aggregate of the lessor’s net investment in sales-type leases and direct financing leases) separately from other assets in the statement of financial position.
  • Lease assets shall be subject to the same considerations as other assets in classification as current or noncurrent assets in a classified balance sheet.

• Statement of Comprehensive Income

  • A lessor shall either present in the statement of comprehensive income or disclose in the notes income arising from leases. If a lessor does not separately present lease income in the statement of comprehensive income, the lessor shall disclose which line items include lease income in the statement of comprehensive income.
  • A lessor shall present any profit or loss on the lease recognized at the commencement date in a manner that best reflects the lessor’s business model(s). Examples of presentation include the following:
    • If a lessor uses leases as an alternative means of realizing value from the goods that it would otherwise sell, the lessor shall present revenue and cost of goods sold relating to its leasing activities in separate line items so that income and expenses from sold and leased items are presented consistently. Revenue recognized is the lesser of: The fair value of the underlying asset at the commencement date or the sum of the lease receivable and any lease payments prepaid by the lessee.
      • Cost of goods sold is the carrying amount of the underlying asset at the commencement date minus the unguaranteed residual asset.
    • If a lessor uses leases for the purposes of providing financing, the lessor shall present the profit or loss in a single line item.

• Statement of Cash Flows

  • A lessor shall classify cash receipts from leases within operating activities.

Operating Leases

• Statement of Financial Position

  • A lessor shall present the underlying asset subject to an operating lease in accordance with other Topics.

• Statement of Cash Flows

  • A lessor shall classify cash receipts from leases within operating activities.

Financial Statement Disclosure Requirements For Lessors Who Have Adopted ASC 842

*The following content comes directly from FASB guidance on disclosures requirements for Lessors under ASC 842. 

 General

• The objective of the disclosure requirements is to enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. To achieve that objective, a lessor shall disclose qualitative and quantitative information about all of the following:
  • Its leases
  • The significant judgments made in applying the requirements in this Topic to those leases
  • The amounts recognized in the financial statements relating to those leases
• A lessor shall consider the level of detail necessary to satisfy the disclosure objective and how much emphasis to place on each of the various requirements. A lessor shall aggregate or disaggregate disclosures so that useful information is not obscured by including a large amount of insignificant detail or by aggregating items that have different characteristics.
• A lessor shall disclose both of the following:
  • Information about the nature of its leases, including:
    • A general description of those leases
    • The basis and terms and conditions on which variable lease payments are determined
    • The existence and terms and conditions of options to extend or terminate the lease
    • The existence and terms and conditions of options for a lessee to purchase the underlying asset.
  • Information about significant assumptions and judgments made in applying the requirements of this Topic, which may include the following:
    • The determination of whether a contract contains a lease
    • The allocation of the consideration in a contract between lease and non-lease components
    • The determination of the amount the lessor expects to derive from the underlying asset following the end of the lease term.
  • A lessor shall disclose any lease transactions between related parties
  • A lessor shall disclose lease income recognized in each annual and interim reporting period, in a tabular format, to include the following:
    • For sales-type leases and direct financing leases:
      • Profit or loss recognized at the commencement date (disclosed on a gross basis or a net basis consistent)
      • Interest income either in aggregate or separated by components of the net investment in the lease.
    • For operating leases, lease income relating to lease payments.
    • Lease income relating to variable lease payments not included in the measurement of the lease receivable.
  • A lessor shall disclose in the notes, the components of its aggregate net investment in sales-type and direct financing leases (that is, the carrying amount of its lease receivables, its unguaranteed residual assets, and any deferred selling profit on direct financing leases).
  • A lessor shall disclose information about how it manages its risk associated with the residual value of its leased assets. In particular, a lessor should disclose all of the following:
    • Its risk management strategy for residual assets
    • The carrying amount of residual assets covered by residual value guarantees (excluding guarantees considered to be lease payments for the lessor
    • Any other means by which the lessor reduces its residual asset risk (for example, buyback agreements or variable lease payments for use in excess of specified limits).

Sales-Type and Direct Financing Leases

• A lessor shall explain significant changes in the balance of its unguaranteed residual assets and deferred selling profit on direct financing leases.
• A lessor shall disclose a maturity analysis of its lease receivables, showing the undiscounted cash flows to be received on an annual basis for a minimum of each of the first five years and a total of the amounts for the remaining years. A lessor shall disclose a reconciliation of the undiscounted cash flows to the lease receivables recognized in the statement of financial position (or disclosed separately in the notes).

Operating Leases

• A lessor shall disclose a maturity analysis of lease payments, showing the undiscounted cash flows to be received on an annual basis for a minimum of each of the first five years and a total of the amounts for the remaining years. A lessor shall present that maturity analysis separately from the maturity analysis required for sales-type leases and direct financing leases.
• A lessor shall provide disclosures required by Topic 360 on property, plant, and equipment separately for underlying assets under operating leases from owned assets.

UPDATE: EFFECTIVE JULY 17, 2019, THE FINANCIAL ACCOUNTING STANDARDS BOARD (FASB) VOTED UNANIMOUSLY TO PROPOSE DELAYING THE EFFECTIVE DATE FOR ASC 842 FOR PRIVATELY HELD COMPANIES AND NONPROFIT ORGANIZATIONS.  THE FASB WILL ISSUE A FORMAL PROPOSAL FOR PUBLIC COMMENT BEFORE FINALIZING THE NEW EFFECTIVE DATES OF ANNUAL FINANCIAL REPORTING PERIODS BEGINNING AFTER DECEMBER 15, 2020. The new standard will require entities to use a modified retrospective approach to the earliest period presented.  Companies are now evaluating the reporting and economic implications of the new standard.

You will want to be familiar with these presentation and disclosure requirements from a lessor perspective. For more information regarding lease accounting and ASC 842, please contact your Keiter representative or Email | Call 804.747.0000

Additional Resources on ASC 842:

Appropriate Discount Rates for Leases Under ASC 842

Delay in Implementation of New Lease Standard?

How Does ASC 842 Impact Construction Companies?

What Construction Companies Should Consider When Implementing ASC 842

Accounting for Office Leases under ASC 842

FASB Reissues Targeted Improvements to Leases Standard