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Presentation and disclosure

9.3.1.2 Operating lease

A lessor should classify assets subject to operating leases as property, plant, and equipment (e.g.,
within buildings) or as a separate line item on the balance sheet (e.g., assets subject to operating
leases). As with other fixed assets, property subject to operating leases may be presented net of
accumulated depreciation on the balance sheet, but the accumulated depreciation should be shown on
the face of the balance sheet or disclosed in the notes to the financial statements.

For operating leases with rents that change over time, the requirement to recognize rental income on a
straight-line basis may generate a rent receivable or deferred rent revenue on the lessor’s balance
sheet. A lessor may also need to recognize a prepaid asset on the balance sheet arising from initial
direct costs that the lessor will recognize as an expense over the lease term. Lessors should present a
rent receivable, deferred rent, or prepaid initial direct costs with items of similar maturities on a
classified balance sheet; for example, with other prepaid items associated with long-term contracts.
See FSP 2 for information on balance sheet classification.

9.3.2 Income statement

LG 2 addresses certain concepts that impact the presentation in the income statement, including:

□ Taxes (LG 2.4.1): Any payment that the lessee makes to a third party for taxes that are deemed
to be lessor costs (e.g., property taxes ) should be presented in the income statement as
revenue and expense (i.e., grossed up). For example, if the lessee makes a payment of
$100,000 directly to the taxing authority for real estate taxes, the lessor would record revenue
of $100,000 and real estate tax expense of $100,000. However, as of the date of this
publication, the FASB has issued an exposure draft proposing to permit the lessor to make an
accounting policy election to exclude these amounts from revenue and expense for all taxes
assessed by a governmental authority that are both imposed on and concurrent with a specific
lease revenue-producing transaction and collected by the lessor from a lessee. Refer to the
FASB’s website for status on this issue.

□ Other lessor costs paid directly by the lessee to a third party (LG 2.4.1): Any payment that the
lessee makes to a third party for lessor costs should be presented in the income statement as
revenue. The FASB has issued an exposure draft proposing that the lessor exclude these costs
when the uncertainty in the variable payment may not be expected to ultimately be resolved,
when it is not practicable for the lessor to reasonably estimate the lessor costs paid by a lessee
to a third-party, and the lessee is not required to report such payments to the lessor.

□ Combining lease and certain nonlease components (LG 2.4.4.1): A lessor can elect a practical
expedient, by class of underlying asset, to present lease and nonlease components together as
one combined component if certain conditions are met. The combined component should be
accounted for as a single performance obligation in accordance with ASC 606, Revenue from
Contracts with Customers, if the nonlease component is the predominant component.
Otherwise, the lessor should account for the combined component as a lease.

□ Embedded leases (LG 2.3): Some leases embedded in service contracts may not have explicit
consideration stated for the embedded lease. We believe arrangements that do not have stated
consideration for embedded leases should generally be accounted for on a gross basis. Thus, a
vendor should gross up its income statement for the “free” embedded lease. That is, the

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