The FASB has issued an Exposure Draft related to Leases (Topic 842) intended to improve three targeted areas of the lease guidance. The Exposure Draft is in response to implementation concerns brought to the attention of the FASB as public companies began implementing Topic 842.

The first matter addressed in the Exposure Draft relates to lessor accounting of sales-type leases with variable payments. As currently issued, ASC 842 requires that a lessor determine if a lease is classified as a sales-type lease exclusive of variable payments that do not depend on a reference index or rate from the lease receivable. These variable payments are subsequently recognized as lease income when the changes in facts and circumstances occur that the variable payments are based upon. This situation can result in a lessor recognizing a loss at lease commencement despite the fact that the lessor expects the arrangement to be profitable overall. The amendments in the Exposure Draft change the lease classification requirements for lessors by allowing leases with predominantly variable lease payments that do not depend on a reference index or rate to be classified as operating leases rather than sales-type leases.

The second targeted matter in the Exposure Draft relates to the remeasurement by a lessee of a lease liability due to a change in a reference index or rate that variable lease payments are based upon. As currently issued, ASC 842 prohibits remeasurement in these cases but this is divergent from the requirements of IFRS 16, Leases. The amendments in the Exposure Draft would provide lessees with the option to make an entity-wide accounting policy election to remeasure a lease liability due to a change in future lease payments based upon a reference index or rate. The FASB believes this accounting policy election will be useful for entities that report under both U.S. GAAP and IFRS.

The final targeted matter in the Exposure Draft relates to the modifications of contracts that provide a lessee with the right to use multiple assets. The Exposure Draft clarifies that entities are exempted from applying modification accounting in the situation when a lease component is terminated before the end of the lease term and the termination does not economically affect the remaining lease components.

For entities that have not yet adopted Topic 842, the transition method of this Exposure Draft would be consistent with the transition method used when Topic 842 is adopted. For entities that have adopted Topic 842, transition methods would generally be allowed for retrospective or prospective application.

The full text of the Exposure Draft is available here.

 

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