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Presentation and disclosure

selling profit. A direct financing lease results in a loss if the present value of the lease payments using
the rate implicit in the lease and estimated residual value is less than the lessor’s carrying value of the
asset plus initial direct costs at lease commencement. This could occur in lease arrangements that have
significant variable payments. See LG 4.3.1.1 for additional details.

Variable lease payments

ASC 842 does not explicitly address whether variable lease payments received for a direct financing
lease or sales type lease should be presented as lease income or interest income. We believe that either
presentation is appropriate but careful consideration should be given to the economics of the lease
when making this determination. For example, if a lease with all variable payments is classified as a
sales type lease, no lease receivable would be recorded; in this case, it would be difficult to support
presentation of the variable payments as interest income given there is no receivable associated with
the lease.

9.3.2.2 Operating lease

A lessor should recognize all of the following:

□ Lease payment as income in profit or loss over the lease term on a straight-line basis unless
another systematic and rational basis is more representative of the pattern in which a benefit
is expected to be derived from the use of the underlying asset

□ Variable lease payments as income in profit or loss in the period in which changes in facts and
circumstances on which the variable lease payments are based occur

□ Initial direct cost as an expense over the lease term on the same basis as lease income

A lessor should continue to measure the underlying asset subject to an operating lease in accordance
with other GAAP. Depreciation of the underlying asset should be presented gross and should not offset
rental income.

9.3.2.3 Subleases

ASC 842 requires that an intermediate lessor (i.e., a sublessor) disclose sublease income on a gross
basis, separate from the finance or operating lease expense.

9.3.3 Statement of cash flows – updated December 2018

A lessor is required to classify cash receipts from all lease payments, regardless of lease classification,
as operating activities based on the guidance in ASC 842-30-45-7. However, there is conflicting
guidance related to the classification of sales-type and direct financing lease activities in the cash flow
statement for entities within the scope of ASC 942, Financial Services – Depository and Lending.
Specifically, the example in ASC 942-230-55-2 has these lease activities generally classified as
investing (consistent with the treatment for lending activities). Accordingly, we believe it would be
acceptable for entities within the scope of ASC 942 to either continue following the guidance in the
example in ASC 942-230-55-2 or to follow the cash flow guidance in ASC 842. This should be an
accounting policy election applied on a consistent basis.

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