Dive Brief:

• Companies won’t have to recognize day-one losses on assets they make available under variable-payment, sales-type leases under changes the Financial Accounting Standards Board (FASB) approved last week.

• FASB rules require companies that enter into contracts to lease out assets such as printers to account for the transaction as a loss at the beginning of the lease period, called a day-one loss, even if the contract is expected to make the company money over the life of the contract.

• The rule stems from sweeping lease accounting changes FASB approved years ago, known as ASC 842, that took effect for public companies in 2019. Those changes require companies to show operating leases on their balance sheet, rather than in a footnote to their financial reports, the same way they do capital leases. Private companies and nonprofits were to make the changes in 2020, but FASB delayed implementation to 2021 because of the pandemic. 

Dive Insight:

Last week’s rule change removes the requirement companies recognize a day-one loss on new sales-type lease contracts with variable payments. 

“I think this … actually conforms us to what the practice was pre-842,” FASB chair Richard Jones said.  

Critics wanted the rule changed because the loss was a bookkeeping one only and could confuse analysts and investors.

“The approach is a practical solution that would result in financial reporting outcomes that more faithfully represent the economics of the transaction,” FASB staff project manager Bobbi Gwinn said. 

The new rule, which takes effect for the fiscal year beginning after Dec. 15, 2021, aligns the standard with the International Accounting Standards Board. Companies that have already implemented the broader lease accounting changes under ASC 842 can implement the new rule prior to that date.

Access FASB's meeting material on this and other issues.