The U.S. Financial Accounting Standards Board (FASB) has introduced an update to improve the requirements related to a lessor’s accounting for certain leases with variable lease payments. The need for this has become apparent as a result of studying the practice of applying the standards in Topic 842 “Leases”.

After studying the feedback received, some practical misunderstandings were clarified. Thus, lessors sometimes have to recognize a selling loss at lease commencement, in the case of sale-type lease with variable lease payments. ‘Start-up’ costs are recognized even if the lessor expects the arrangement will be profitable.

As some stakeholders highlighted in the study of accounting practices, in such circumstances, the financial reporting does not accurately represent the underlying economics either at lease commencement, or over the lease term, and this information is not useful to users.

To address this issue, the FASB decided to change the lessor lease classification requirements. They will now have to classify and account for a lese with variable payments as an operating lease if:

  • the lease is classified as a sale-type lease when the lessor (usually the manufacturer) actually sells products, or a direct financing lease,


  • the lessor would have otherwise recognized a day-one loss – at lease commencement.

Operating lease does not require the recognition of ‘start-up’ costs, so that financial reporting in the United States will now more faithfully reflect the underlying economics.