This week, FASB announced a proposed Accounting Standards Update (ASU) to address challenges that lessors may encounter as they implement the board’s new lease accounting standard, ASC 842.

The ASU is in response to inquiries received and feedback from stakeholders and applies to two specific areas. The first relates to guidance on determining the fair value of the underlying asset by lessors that are not manufacturers or dealers, and the second to the presentation on the statement of cash flows related to sales-type and direct financing leases.

In the first area, Determining the Fair Value of the Underlying Asset by Lessors That Are Not Manufacturers or Dealers, the proposal would allow lessors, generally at financial institutions and captive finance companies, to apply financial standards that more closely match their current business practices. Under the proposed updates these lessors could continue to apply the fair value exception in Topic 842 as they have done under Topic 840, where “fair value is ordinarily the underlying asset’s cost, reflecting any volume or trade discounts that may apply” rather than as it is defined under Topic 820.

In the second area, FASB clarifies guidance on the Presentation on the Statement of Cash Flows related to sales-type and direct financing leases where conflicting language between Topic 842 and Topic 842 is eliminated. Under this proposal, Topic 942 would be amended to address concerns regarding “how cash received from leases by lessors from sales-type and direct financing leases should be presented in the cash flow statement.”

For public business entities, the effective date for the proposed amendments to Topic 824 is for fiscal years beginning after December 15, 2019.

To read more about this proposed ASU, you can find FASB’s Exposure Draft here.