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Lessors may classify leases as operating, sales-type, direct financing leases, or leveraged leases.

14.4.1A General disclosure requirements (ASC 840)

Regardless of the type of lease, ASC 840-10-50-4 requires all lessors should disclose a general description of their leasing arrangements, including a description of leasing transactions with related parties. See FSP 26 for disclosures of related party transactions.
As discussed in ASC 840-10-50-5, lessors should also disclose their accounting policy for recognizing contingent rental income. Generally, lessors would not recognize contingent income until the contingency has been resolved.

14.4.2A Operating leases (ASC 840)

In an operating lease, a lessor transfers the use of an asset to a lessee for a period of time but does not transfer substantially all of the benefits or risks of owning the asset.

14.4.2.1A Presentation (ASC 840)

Unlike lessees, lessors reflect assets subject to operating leases on the balance sheet. They report the leased asset either (1) together with their other property, plant and equipment (e.g., within “buildings”), or (2) as a separate line item on the balance sheet (e.g., “assets subject to operating leases”). Property subject to leases may be presented net of accumulated depreciation on the balance sheet, but the accumulated depreciation must either be shown on the face of the balance sheet or disclosed in the footnotes.
For operating leases with scheduled rent changes, the ASC 840-20-25-1 requirement to recognize rental income on a straight-line basis may generate rents receivable or deferred rent revenue on the lessor's balance sheet. Lessors should present such rent receivable or deferred rent with items of similar maturities on a classified balance sheet, for example, with other prepaids associated with long term contracts.
Lessors should present rental income and depreciation gross in the income statement as revenue and expense, respectively.

14.4.2.2A Disclosure (ASC 840)

The disclosure requirements for lessors' operating leases are more extensive than they are for lessees. If leasing is a significant part of a lessor's business activities (as measured by revenue, net income, or assets), a lessor should disclose the following information with respect to its operating leases in accordance with ASC 840-20-50-4:
  • A general description of the leasing arrangements
  • The cost and carrying amount, if different, by major classes of property according to nature or function
  • Total accumulated depreciation for leased assets as of the latest balance sheet date
  • Minimum future rentals on noncancelable leases as of the latest balance sheet date, in the aggregate and for each of the next five years
  • Total contingent rentals included in income for each period for which an income statement is presented
As a best practice, a lessor should clarify whether the disclosure of minimum future rentals is based on actual payments or income recognition, similar to the discussion in FSP 14.3.2.2A.
For foreign currency transactions, the amount of future minimum rental payments should be translated at the current exchange rate at the balance sheet date.
Example 1 of ASC 840-10-55-47 includes illustration of the disclosure requirements for lessors under operating leases.

14.4.3A Sales-type leases and direct financing leases (ASC 840)

A lessor in a sales-type lease or direct finance lease transfers substantially all of the benefits or substantially all of the risks of ownership of the asset to a lessee. These leases are similar to a financed sale of the asset.

14.4.3.1A Presentation (ASC 840)

In sales-type and direct financing leases, the lessor derecognizes the leased property, plant, and equipment and recognizes a financing receivable on its balance sheet. The lessor presents this receivable as a separate line item or combined within the same line item as long-term financing receivables or similar assets in a classified balance sheet.
The financing receivable is referred to as a "net investment in leased property." This receivable represents the present value of both the minimum lease payments receivable (net of executory costs that may be embedded in the lease payments) and the unguaranteed residual value of the property at the end of the lease (plus any capitalized initial direct costs to originate a direct financing lease). The difference between the gross cash flows and the discounted cash flows is referred to as "unearned income." These amounts are reported on the balance sheet as a single line item.
As discussed in ASC 840-30-35-23, a lessor should report the amortization of initial direct costs as a component of finance or lease income in accordance with ASC 310, Receivables. In other words, the amortization of the initial direct cost is reported in the income statement as a reduction of interest income rather than as amortization expense.

14.4.3.2A Disclosure (ASC 840)

If leasing is a significant part of the lessor's business activities (as measured by revenue, net income, or assets), the lessor should disclose the components that make up its net investment in sales-type or direct financing leases. As discussed in ASC 840-30-50-4(a), the disclosure should include the following components:
  • Future minimum lease payments receivable, with separate deductions for both executory costs (including any profit thereon), and the accumulated allowance for uncollectible minimum lease payments receivable
  • The unguaranteed residual values accruing to the benefit of the lessor
  • Initial direct costs (for direct financing leases only)
  • Unearned income
Minimum lease payments
As discussed in ASC 840-30-50-4(b), a lessor of a direct-financing or sales-type lease should disclose future minimum lease payments receivable for each of the next five fiscal years. There is no specific guidance that requires a sales-type or direct financing lessor to disclose (or that prohibits a lessor from disclosing) total minimum lease payments receivable (i.e., including amounts due beyond five years).
Contingent rentals
A sales-type or direct financing lessor should disclose total contingent rentals included in income for each period for which an income statement is presented, as described in ASC 840-30-50-4(c). It should also describe the terms of its contingent rent arrangements and how and when contingent rents are recognized in income.
Example 1 of ASC 840-10-55-47 includes illustration disclosures of sales-type and direct financing leases.

14.4.4A Leveraged leases (ASC 840)

A leveraged lease is a type of a direct finance lease that meets specific criteria. For example, in a leveraged lease, the lessor must obtain substantial nonrecourse financing from a third party. Also, the cash flows to the lessor in a leveraged lease result in a net investment in the lease that declines in the early years of the lease but then increases.

14.4.4.1A Presentation (ASC 840)

As discussed in ASC 840-30-45-5, leveraged leases are unique in that a lessor presents the investment in the lease on the balance sheet, net of principal and interest owed on the related non-recourse debt. It is one of the few times when accounting guidance requires a reporting entity to net its receivables from one party with its obligations to a different party. Leveraged leases also have a unique revenue recognition pattern that differs from the accounting for other financial assets.
Figure 14-1A illustrates the components of a lessor’s investment in a leveraged lease.
Figure 14-1A
Components of the investment
Classified balance sheet
Presentation of leveraged leases in a classified balance sheet can be challenging because the investment in leveraged leases contains a combination of different cash inflows (e.g., rents receivable) and outflows (e.g., debt service). One of the defining features of a leveraged lease is that the investment balance declines and then rises at least once (and maybe more than once) over the lease term. This could appear to present a “negative” current portion of the investment in leveraged leases in a classified balance sheet. Therefore, an investment in a leveraged lease is typically classified entirely as a noncurrent asset because of the impracticality of separating the investment into current and noncurrent portions.
Deferred taxes
Notwithstanding that a lessor's "investment in leveraged leases" may include investment tax credits (ITCs), ASC 840-30-45-5 requires a lessor to present deferred taxes related to leveraged leases separate from the investment in leveraged leases on the balance sheet. The lessor may present these amounts separately on the face of the balance sheet or combine them with other deferred taxes. In either case, the lessor should disclose deferred taxes related to leveraged leases separately in the footnotes.
Investment tax credit presentation by a leveraged lessor
Some lessors report the amortization of ITC on leveraged leases as operating income because they view the ITC amortization as an integral part of their rate of return on the lease financing. Other lessors report it as a component of the income tax provision. The examples included in ASC 840-30-55-29 through ASC 840-30-55-38 include ITC amortization in income tax expense. It is also acceptable to reflect ITC amortization as part of pretax income. The elected method should be disclosed and consistently applied.

14.4.4.2A Disclosure (ASC 840)

Given the unique accounting characteristics for leveraged leases, they require significant disclosure.
A lessor is required to provide a general description of its leveraged leasing activity. Also, as discussed in ASC 840-30-50-5, if leveraged leasing is a significant part of the lessor's business activities (in terms of revenue, net income, or assets), the lessor's footnotes should disclose each of the components of the "net investment in leveraged leases," including the deferred taxes related to the leveraged lease. This disclosure, which is typically presented in a tabular format, usually includes a subtotal of all components of the investment in leveraged leases other than the deferred taxes (which should tie to the "investment in leveraged leases" line item on the balance sheet). Deferred taxes arising from leveraged leases is then subtracted to arrive at a lessor's "net investment in leveraged leases."
As discussed in ASC 840-30-50-4, a leveraged lease is not subject to the specific disclosure requirements for sales-type or direct financing leases. For example, a lessor of a leveraged lease does not need to disclose a five-year table for minimum rental payments receivable.
ASC 840-30-55-34 includes an example footnote disclosure for investments in leveraged leases.
Deferred taxes
The lessor in a leveraged lease should either present deferred taxes related to leveraged leases separately on the face of the balance sheet or disclose the amount in the footnotes. See FSP 14.4.4.1A.
Effect of a change in tax law or rates on leveraged leases
The basic model for accounting for taxable temporary differences arising from leveraged leases is governed by ASC 840, rather than by ASC 740. Accordingly, the accounting for a change in tax rates or tax laws may affect leveraged leases in a manner that distorts the usual relationship between income taxes and pretax income. When tax rates or laws change, and the accounting for the change on leveraged leases results in this unusual relationship, ASC 840-30-50-6 requires lessors to disclose the reason for such variation if it is not otherwise clear.
For SEC registrants, ASC 840-30-S99-2 addresses issues relating to the calculation and reporting of adjustments to net investments in leveraged leases required by a change in tax law or rates. In ASC 840-30-S99-2, the SEC noted that it expects leveraged lessors that are SEC registrants to disclose the cumulative effect that the changes in tax laws or rates have on pretax income and income tax expense.
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