Defining Issues | April 2021

 

Insight

FASB to finalize lease amendments

Lessor leases with variable payments will be classified as operating if another classification would trigger a Day 1 loss.

Scott Muir

Scott Muir

Partner, Dept. of Professional Practice, KPMG US

+1 212-909-5073

Richard Binderup

Richard Binderup

Senior Manager, Dept. of Professional Practice, KPMG US

+1 713-319-2832

Robin Van Voorhies

Robin Van Voorhies

Director, Dept. of Professional Practice, KPMG US

+1 617-988-5637

On April 14, 2021, the FASB tentatively decided to issue a final ASU requiring lessors to classify leases with variable payments as operating leases if another classification would result in a commencement date selling loss.

Applicability

ASC 842, Leases

  • All companies and not-for-profit entities

Relevant dates

  • April 14, 2021 – FASB reaches final decision on lessor leases with variable payments that would trigger a Day 1 loss if classified as sales-type or direct financing – Tentative decisions
  • February 10, 2021 – FASB redeliberates proposals, removing two of the three issues from its technical agenda – Tentative decisions  
  • December 4, 2020 – Comments deadline on proposed ASU
  • October 20, 2020 – Proposed ASU with ‘targeted improvements’ to ASC 842 issued
  • July 29, 2020 – Leasing and agenda-setting decisions reached

Key impacts

At the April 14, 2021 meeting, the FASB decided that lessors will classify a lease as an operating lease if (1) the payments for the lease are entirely or partially variable and (2) a commencement date selling loss would result from classifying the lease as a sales-type or direct financing lease.

February 10, 2021 meeting decisions:

  • The FASB asked the staff to evaluate the effects of expanding the scope of the proposal. The expanded scope would include all lessor arrangements for which excluding expected variable lease payments from the measurement of the net investment in the sales-type lease would give rise to a Day 1 loss, regardless of whether the variable payments are predominant.

October 20, 2020 proposed targeted amendments to ASC 842:

  • Require a lessor to classify a lease as an operating lease if the payments for the lease are predominantly variable, regardless of whether any of the sales-type lease criteria are met. 

February 10, 2021 meeting decisions:

  • The FASB decided to not proceed with the proposal and agreed to remove the issue from its technical agenda.

October 20, 2020 proposed targeted amendments to ASC 842:

  • Permit lessees to elect to account for variable lease payments that depend on an index or rate in a manner consistent with the requirements of IFRS Standards. Under IFRS 16, a lessee is required to remeasure the lease payments, and correspondingly the lease liability and right-of-use (ROU) asset, when the adjustment to the lease payments takes effect from a change in the index or rate used to determine those payments.

February 10, 2021 meeting decisions:

  • The FASB decided to not proceed with the proposal. Instead, the Board asked the FASB staff to consider the appropriate scope and topics for a potential wider project on the lease modification requirements under ASC 842. 

October 20, 2020 proposed targeted amendments to ASC 842:

  • Clarify that when a lease contract containing multiple lease components is modified to early terminate one or more, but not all, of the components, the company (lessee or lessor) would not apply modification accounting to the remaining lease components if the economics of those remaining leases are unchanged by the termination(s).

Report contents

  • Applicability
  • Key facts and impacts
  • Remeasuring variable lease payments that depend on an index or rate
  • Significant variable lease payments
  • Modification or termination of leases within master lease agreements
  • Agenda decisions unrelated to ASC 842
  • Next steps

Related content

Subscribe to our newsletter

Receive timely updates on accounting and financial reporting topics from KPMG.

Receive timely updates on accounting and financial reporting topics from KPMG.

ARO

Use our Accounting Research Online for financial reporting resources.

Use our Accounting Research Online for financial reporting resources.