What Lessors Need to Know About Proposed Changes in Lease Accounting: The Derecognition Approach

In this third in a series of blogs on lease accounting, we are going to the other side. Last week, we talked about the impact on lessees. Today, we delve into what lessors need to know about these proposed changes to the current standards, particularly as it relates to the derecognition approach. The derecognition approach should be used whenever the lease does not expose the lessor to significant risks and benefits associated with the leased asset. The following discussion provides information on using this approach.

Recognition and Measurement

On the balance sheet, the lessor should recognize a lease receivable at the discounted present value of future lease payments and the leased asset at its residual value at the end of the lease term. In subsequent periods, the lease receivable should be measured at amortized cost. The measurement of the leased asset will not change except for any possible impairment. Interest income related to the lease receivable, lease income recognized at the present value of the lease payments, and an expense for the derecognized portion of the leased asset should be reported on the income statement. Any changes to the lease receivable and any income or expense related to changes in the lease term should also be recognized on the income statement during subsequent periods.

Presentation on the Financial Statements

The lease receivable and the leased asset should be shown separately on the balance sheet from other receivables and fixed assets. Interest income and lease income and expense should be shown separately on the income statement from other income and expense. The repayments of the lease receivable and interest income should be classified as an operating activity on the statement of cash flows.

Transition to the New Standards

On the date of initial application of the proposed new guidance, the lessor should recognize a lease receivable for all outstanding leases at the present value of the remaining lease payments. Any leased assets should be recognized at the residual asset value at the end of the lease term.