Real Estate Accounting Made Easy, 2nd Edition

4ACCOUNTING FOR OPERATING PROPERTY REVENUES

On February 25, 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (ASC or Topic 842). Topic 842 was issued to address the off-balance sheet treatment of operating leases by lessees. Topic 842 also retains alignment in key aspects between lessor accounting guidance and the revenue recognition guidance in Topic 606, Revenue from Contracts with Customers. For example, whether a lease is similar to a sale of the underlying asset depends on whether the lessee, in effect, obtains control of the underlying asset as a result of the lease (consistent with the transfer of control principle for a sale in Topic 606), and a lessor is precluded from recognizing selling profit or sales revenue at lease commencement for a lease that does not transfer control of the underlying asset to the lessee.¹

CONTRACTS WITH MULTIPLE COMPONENTS

Similar to lessee lease accounting discussed in greater detail in the next chapter, lessors are required to separate the lease components from the non-lease components of a contract. Topic 842 only deals with the accounting for the lease components. Non-lease components are to be accounted for based on the applicable accounting guidance.

The standard also requires the lessor to allocate the considerations received from a contract between the lease and non-lease components. In addition, a lessor is required to allocate any capitalized costs to the separate lease and non-lease components to which the ...