NetLease - Sublease Classification FAQ

US GAAP

NetLease can automate accounting for your Operating Subleases. Under US GAAP, most subleases are classified as operating leases. The following guidance from the FASB indicates that the assessment of lease classification should reference the underlying asset rather than the ROU asset.

842-10-25-6 

When classifying a sublease, an entity shall classify the sublease with reference to the underlying asset (for example, the item of property, plant, or equipment that is the subject of the lease) rather than with reference to the right-of-use asset.

 This means that most operating leases will end up as Operating Subleases under US GAAP.

IFRS

Under IFRS 16, the guidance specifies that sublease should reference the ROU asset rather than the underlying asset. The result is that if a sublease is for the remaining term of the lease, it will be classified as a Direct Financing lease rather than operating lease. If the Sublease term is only a portion of the remaining term of the original lease, you may still get an operating sublease. (See guidance below). 

IFRS 16 B58

Sublease classification In classifying a sublease, an intermediate lessor shall classify the sublease as a finance lease or an operating lease as follows: 

(a) if the head lease is a short-term lease that the entity, as a lessee, has accounted for applying paragraph 6, the sublease shall be classified as an operating lease. 

(b) otherwise, the sublease shall be classified by reference to the right-of use asset arising from the head lease, rather than by reference to the underlying asset (for example, the item of property, plant or equipment that is the subject of the lease).