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Introduction

Topic ASC 842 guidance Observations
term. Recognition of expense for a
finance lease will be similar to
capital leases in ASC 840.

Lessor accounting The classification criteria are Under ASC 840, to achieve sales-type
similar to that for lessees, with an lease accounting for real estate, title must
additional requirement to assess automatically transfer to the lessee by the
collectibility to support end of the lease term. This condition has
classification as a direct financing been removed from the guidance in ASC
lease. Also, in order to 842.
derecognize the asset and record
revenue, collection of payments In ASC 840, the difference between a
due must be probable for sales- sales-type lease and a direct finance lease
is the presence of upfront profit. When
type leases.
present, the arrangement is a sales-type
To recognize upfront revenue and lease.
profit in a sales-type lease, the Under ASC 842, the key distinction is
lessee will need to obtain control
over the leased asset. based on control. As a practical matter,
this will likely depend on whether the
lease payments criterion has been met in
part due to a third-party residual value
guarantee. When this is the case,
presuming payments are collectible, the
lease is classified as a direct financing
lease.
Lessors do not recognize variable
consideration until the variability is
resolved. As a result, under ASC 842, a
sales-type lease with significant variable
payments may result in a “Day 1” loss for
a lessor. Under ASC 840, such leases
would have instead been classified as
operating leases.

Lease versus A contract may contain lease and Under ASC 840, property taxes and
nonlease nonlease components. Under ASC insurance are considered executory costs.
components 842, components include only Under ASC 842, property taxes and
those items or activities that insurance are not considered as
transfer a good or service to the components of a contract as they are not
lessee. The right to use land is for a service provided by the lessor to the
considered a separate lease lessee and are therefore a part of contract
component unless the accounting payments.
effect of accounting for it Under ASC 840, land is separately
separately would be immaterial.
classified when the fair value of the land
A lessee may choose not to is 25% or more of the combined fair value
separate nonlease components of the land and building.
from their related lease
components. If this election is
made, all cash flows associated
with the nonlease component
would be allocated to the related
lease component. A lessor may
elect to combine lease and

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