An operating-lease lessor keeps the underlying asset on its balance sheet, continues applicable depreciation, and recognizes lease income over the lease term. It does not replace the asset with a net investment in the lease.
Reconcile the retained asset and lease income
Recognize fixed lease payments as income, generally on a straight-line basis unless another systematic basis better represents the benefit pattern. Recognize variable payments in the period in which the changes in facts and circumstances occur. Continue to depreciate the underlying asset under the applicable property guidance and test it for impairment when required. Defer qualifying initial direct costs and recognize them over the lease term on the same basis as lease income.
For example, a lessor rents a standard forklift for three years and expects to redeploy it afterward. The lease fails the sales-type and direct-financing criteria. The lessor keeps the forklift in property, plant, and equipment, records depreciation, recognizes lease income, and retains evidence for the expected residual value. No lease receivable and net-investment schedule replaces the asset.
Collectibility can affect the income-recognition pattern and must be assessed separately. Read operating-lease recognition in ASC 842-30-25-11 and retained-asset measurement in ASC 842-30-35-6.
Put the concept to work
Apply this concept
- Reconcile a supplied operating lessor's retained underlying asset, depreciation boundary, straight-line or other supported lease income, variable income, initial direct cost, entries, and maturity disclosure.
Learning resources
Choose a lesson, try an application, or inspect the sources behind this concept.
Build on these ideas
- Lessor lease classification — Analyze
To apply this concept: Required. Operating accounting is the residual lessor route after sales-type and direct-financing tests.