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Lease classification Intermediate lessor accounting treatment
The original lease is a □ The original right-of-use asset should be derecognized in
finance lease and the accordance with the sales-type lease/direct financing lease
sublease is a sales-type derecognition guidance in ASC 842-30-40-1 (see LG 5.7) and
or direct financing lease
the original lease liability should be accounted for as before
commencement of the sublease.

□ The intermediate lessor should evaluate its net investment in
the sublease for impairment in accordance with the guidance in
ASC 842-30-35-3. See LG 4.7 for information on the
impairment of a net investment in a lease.

The original lease is an □ The original right-of-use asset should be derecognized in
operating lease and the accordance with the sales-type lease/direct financing lease
sublease is a sales-type derecognition guidance in ASC 842-30-40-1 (see LG 5.7) and
or direct financing lease
the original lease liability should be accounted for based on the
accounting for a lease liability in a finance lease (see LG 4).
Note that since the sublease met one of the conditions for a
sales type or direct financing lease and the head lease did not,
the intermediate lessor should evaluate whether the original
assumptions relating to the head lease have changed.
□ The right-of-use asset should be evaluated for impairment prior
to derecognition using the guidance in ASC 360. See LG 4.6 for
information on the impairment of right-of-use assets.

□ After derecognizing the right-of-use asset, the net investment in
the sublease is subject to the impairment guidance in ASC 842-
30-35-3. See LG 4.7 for information on the impairment of a net
investment in a lease.

Accounting for the head lease

Entering into a sublease by an intermediate lessor may trigger remeasurement of the intermediate
lessor’s head lease. This may also require reclassification of the head lease in certain instances. For
example, if the sublease term exceeds the head lease term, the intermediate lessor will need to update
the head lease term to be at least equal to the sublease term, which will require remeasurement and
reassessment of the classification of the head lease. See LG 5.3 for information on the remeasurement
and reassessment of classification of a lease.

8.2.1.2 Intermediate lessor is relieved of its primary obligation under the
head lease

ASC 842-20-40-3 provides guidance on accounting for a head lease and sublease when the
intermediate lessor is relieved of its primary obligation under the original lease.

8-4