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Accounting for leases

The initial recognition and measurement for an operating lease is not impacted by the collectibility of
the payments from the lessee. The lessor continues to recognize the underlying asset on its balance
sheet and continues to depreciate the asset based on its estimated useful life. However, subsequent to
initial recognition, a lessors’s lease income is limited to the lesser of the straight-line rental income (or
another systematic basis if that basis is more representative of the pattern in which income is earned
from the underlying asset over the term of the respective lease) or the lease payments that have been
collected from the lessee.

When the collectibility of the lease payments subsequently becomes probable, the lessor should
recognize the difference between the cumulative lease income recognized to date and the amount that
would have been recognized had the lessor followed the measurement guidance for an operating lease
without the limitation described in ASC 842-30-25-12. The amount is recorded as an adjustment to
lease income in the period in which collectibility is first deemed probable. After such adjustment, the
lessor should follow the general guidance for subsequent measurement of an operating lease (see LG
4.5.2).

4.3.3.2 Examples – lessor accounting for operating leases

Example 4-10 illustrates a lessor’s accounting for an operating lease.

EXAMPLE 4-10

Lessor operating lease recognition – automobile lease

Lessor Corp leases an automobile to Lessee Corp on January 1, 20X9. The following table summarizes
information about the lease and the leased asset.

Lease term 3 years, no renewal option

Economic life of the automobile 6 years

Fair value of the automobile $30,000

Lessor Corp’s carrying value of the
automobile $30,000

Purchase option Lessee Corp has the option to purchase the automobile at fair
market value upon expiration of the lease.
Monthly lease payments $500 for the first year

$550 for the second year
$600 for the third year

Payment date Beginning of the month (first payment is made at lease
commencement)

Rate implicit in the lease 8%

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