GT News

Taxes, accounting, law and more. All the key news for your business.

| November 30, 2021

New rule for accounting for Leases with variable payments

Share article:

On 19 July 2021, the Financial Accounting Standards Board (FASB) issued an update to ASC 842 Leases to address accounting for lessor-side variable-payment leases. This update therefore does not affect the lessee side.

The reason for the change in accounting was the so-called “day one loss”, which arose because the variable payment was not included in the calculation of the net investment and the lessor therefore recognised the loss at the beginning of the new lease contract. Such reported leases were misleading to users of the financial statements and did not provide a relevant picture; therefore, an update to ASC 842 Leases marked ASU 2021-05 was created.

Under the updated rules, a lessor must reclassify any lease as an operating lease, even if it was previously recorded as a sales-type lease or direct finance lease, but only if the lease contains a variable payment regardless of its amount.

For entities (lessors) that are public business entities or certain not-for-profit entities that adopted ASC 842 as of 19 July 2021, these amendments are effective for accounting periods beginning after 15 December 2021 already. Other accounting entities that also adopted ASC 842 as of 19 July 2021 will not apply the rule until accounting periods beginning after 15 December 2022. Entities that have not adopted ASC 842 as of 19 July 2021, must follow the special conditions for potential use of this new rule.