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8.2.1 Accounting by the intermediate lessor

Subleases of right-of-use assets are within the scope of ASC 842 and should be accounted for in the
same way as other leases. The intermediate lessor should separately account for the head lease and
sublease unless it is relieved of its primary obligation under the head lease. See LG 8.2.1.2 for
additional information. See LG 3 and LG 4 for information on the classification and accounting for the
head lease prior to the intermediate lessor entering into a sublease.

As discussed in ASC 842-10-25-6, an intermediate lessor should determine the classification of the
sublease based on the underlying asset, rather than the right-of-use asset arising from the head lease.

ASC 842-10-25-6
When classifying a sublease, an entity shall classify the sublease with reference to the underlying asset
(for example, the item of property, plant, or equipment that is the subject of the lease) rather than with
reference to the right-of-use asset.

8.2.1.1 Accounting for the arrangement when the intermediate lessor is not relieved of its
primary obligation under the head lease

ASC 842-20-35-14 discusses the accounting for the head lease when an intermediate lessor enters into
a sublease and the intermediate lessor is not relieved of its primary obligation under the head lease.
Figure 8-2 summarizes the accounting for various lease types. ASC 842-20-35-15 specifies that the
intermediate lessor should use the rate implicit in the lease to classify the sublease and also measure
the net investment in a sublease classified as a sales-type or direct financing lease. If such rate cannot
be readily determined, the intermediate lessor should use the discount rate that it originally used to
account for the head lease.

Figure 8-2
Accounting for a head lease and related sublease when the intermediate lessor is not relieved of its
primary obligation under the head lease

Lease classification Intermediate lessor accounting treatment

Sublease is classified as □ Regardless of whether it is an operating or finance lease, the
an operating lease intermediate lessor should continue to account for the head
lease as before commencement of the sublease.

□ If the total remaining lease cost (on the head lease) for the term
of the sublease is more than the anticipated sublease income
for that same period, this is an indicator that the carrying
amount of the right-of-use asset associated with the head lease
may not be recoverable. The right-of-use asset should be
assessed for impairment in accordance with ASC 360-10-35-21;
we believe the lease provisions (e.g., the term of the head lease
and sublease) should be considered when assessing whether
there is an impairment. See LG 4.6 for guidance on the
impairment of a right-of-use asset.

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