How does a lessor account for a direct financing lease under ASC 842?

• A. The lessor recognizes sales profit upfront and amortizes initial direct costs over the lease term.
• B. The lessor recognizes profit only at the end of the term.
• C. The lessor records no revenue until the term ends.
• D. The lessee recognizes the entire revenue.

Answer: (C)

In ASC 842, a direct financing lease for the lessor is accounted for by recording a net investment in the lease rather than recognizing selling profit upfront. The underlying asset is derecognized to the extent of that net investment, and any initial direct costs are included in the net investment. The lessor then earns interest income over the lease term, recognizing it as the net investment is amortized through lease payments using the effective interest method. There is no upfront profit booked at inception, and revenue is recognized over time rather than all at once or only at the end. So the description that there is no revenue recognized upfront aligns with the idea that no sales profit is recorded at inception, with the ongoing revenue coming as interest income over the lease term.