Under ASC 842, a lessor with an operating lease keeps the property on its balance sheet, continues to depreciate it, and recognises lease income on a straight-line basis over the lease term regardless of when the cash arrives. There is no right-of-use asset and no lease liability on the lessor's books. The entries that matter are the monthly straight-line revenue entry, the deferred rent receivable that absorbs the difference between straight-line and cash, the amortisation of initial direct costs, and the treatment of incentives, variable payments and modifications.

If you are the lessor, most of what you've read about ASC 842 doesn't apply to you. Nearly every guide online is written for tenants: ROU assets, lease liabilities, discount rates, remeasurement. Property companies sit on the other side of the same lease, and the entries are different, simpler in some ways and more error-prone in others. This post is the lessor's set, with numbers.

What ASC 842 is and how to set up compliance is covered in our guide to NetSuite lease accounting under ASC 842 and IFRS 16; the straight-line mechanics themselves are in how to set up straight-line rent calculations. This post assumes both and gets straight to the debits and credits.

Why lessor accounting is different

The lessee's problem under ASC 842 is putting the lease on the balance sheet. The lessor's problem is that the asset was already there. A landlord who owns a building records it at cost, depreciates it over its useful life, and treats the lease as the way the building earns revenue. ASC 842 changed very little about that for operating leases; the model carried over largely intact from ASC 840.

What the standard does require of lessors: classify every lease (operating, sales-type or direct financing) at commencement; recognise operating lease income straight-line unless another systematic basis is more representative; capitalise and amortise initial direct costs; net lease incentives against lease payments; recognise variable payments when the triggering event occurs; and assess collectibility, limiting revenue to cash received when collection of the payments is not probable.

For a property landlord, almost every lease is an operating lease, so this post works one operating lease end to end.

The example lease. 10,000 sf office space. Five-year term, commencing 1 January. Base rent $25,000 a month in year one, escalating 3% each anniversary. A $25,000 security deposit. A $45,000 leasing commission paid at signing. A $150,000 tenant improvement allowance paid to the tenant in month two.

Straight-line monthly revenue before incentives: $1,592,740.68 ÷ 60 = $26,545.68.

Entries at commencement

Nothing happens to the building. It stays in fixed assets and keeps depreciating. The commencement entries are for the money that moved around the lease.

Security deposit received

The deposit is the tenant's money held on their behalf. It is a liability, not revenue, and in many states it must be held in a segregated account.

Initial direct costs (leasing commission)

Initial direct costs under ASC 842 are narrower than under ASC 840: only incremental costs that would not have been incurred had the lease not been obtained. Commissions qualify. Internal salaries, legal fees for negotiation and costs of evaluating the tenant's credit do not; those are expensed as incurred. If your broker invoice bundles "marketing" with the commission, split it.

The monthly entry: straight-line revenue and deferred rent

This is the entry that runs sixty times, and the one to get right.

Month 1 (year 1 rent $25,000.00, straight-line $26,545.68)

Revenue is the straight-line figure. Cash is what the lease says this month. The difference is a receivable: the tenant will pay it back through the higher rents in years four and five.

Initial direct cost amortisation, every month

$45,000 over 60 months. Straight-line, same pattern as the revenue it relates to.

Depreciation continues as before

The lease doesn't change the building's depreciation. If you capitalised leasehold improvements you own, they depreciate too, typically over the shorter of their useful life and the lease term.

How the deferred rent receivable moves over the term

The receivable builds while cash rent is below straight-line and unwinds when cash rent is above it. It must reach zero in the final month; if it doesn't, the schedule is wrong.

(The twelve cents is rounding; the final month's entry absorbs it.)

Month 49 (year 5, cash above straight-line)

Same revenue as month one. The receivable is now being credited down instead of debited up.

Lease incentives and tenant improvements from the lessor side

The $150,000 TI allowance changes the revenue figure, and how it changes it depends on who owns the improvements.

If the improvements are the tenant's asset (the tenant designed and built them, owns them, and removes or abandons them at expiry), the allowance is a lease incentive. Under ASC 842 a lessor nets incentives paid against lease payments, so the straight-line revenue falls:

($1,592,740.68 − $150,000) ÷ 60 = $24,045.68 a month.

Then the monthly revenue entry uses $24,045.68 instead of $26,545.68, and the incentive amortises at $2,500 a month against it. The economic point is the one from our post on TI allowance vs rent abatement vs free rent: an incentive is a reduction in rent, so it is recognised as one.

If the improvements are the landlord's asset (landlord specified them, owns them, and they have value to the next tenant), the allowance is capitalised as a leasehold improvement and depreciated. Revenue stays at $26,545.68.

The judgement between the two is the single most common lessor-side error we see, and it is usually made by default rather than by analysis. The accounting treatment itself is covered in depth in how a tenant improvement allowance is accounted for; the point here is that the decision changes the monthly revenue entry by $2,500, every month, for five years.

Variable payments: CAM, taxes and percentage rent

Variable lease payments are excluded from the straight-line calculation and recognised when the event that triggers them occurs. For a landlord that means three separate streams.

Percentage rent. Recognised in the period the tenant's sales cross the breakpoint. Nothing is accrued in advance.

CAM and operating expense recoveries. Under ASC 842 the services behind CAM (cleaning, maintenance, security) are non-lease components, and most lessors elect the practical expedient to combine them with the lease component when the timing and pattern of transfer are the same. Either way, they are recognised as the costs are incurred and billed, not straight-lined.

The annual true-up posts as an additional receivable or a credit against it. The mechanics are in our guide to annual CAM reconciliation.

Property tax and insurance reimbursements. These are not components of the contract at all under ASC 842, because they don't transfer a good or service to the tenant. The lessor makes a policy election to present them gross (revenue and expense) or net. Whichever is chosen, apply it consistently and disclose it.

Keep the three revenue lines separate in the chart of accounts. A single "rental income" account that mixes straight-line base rent with CAM and percentage rent makes the deferred rent reconciliation impossible to prove.

Collectibility: when straight-line stops

ASC 842-30-25-12 requires the lessor to assess whether collection of the lease payments is probable. If it is not, lease income is limited to the lesser of straight-line income and the cash actually received, and any deferred rent receivable is reversed.

Suppose at the end of year 2 the tenant is four months in arrears and the assessment changes to "not probable." The deferred rent receivable balance is $28,096.32.

From that point, revenue equals cash received, until collectibility becomes probable again, at which point the cumulative straight-line catch-up is recognised. This is the entry that gets missed in a manual close and found by auditors in a downturn.

Modification and termination entries

Modification: At the start of year 4 the tenant extends for two more years at $28,500 a month. The extension is not a separate contract (it doesn't grant an additional right of use at standalone price), so the lessor reassesses classification (still operating) and recalculates straight-line revenue prospectively from the modification date.

Remaining payments after modification: years 4 and 5 of the original ($665,470.68) plus 24 months at $28,500 ($684,000) = $1,349,470.68. The existing deferred rent receivable of $28,374.48 has to unwind over the new remaining term as well:

($1,349,470.68 − $28,374.48) ÷ 48 = $27,522.84 a month, for months 37 to 84.

No P&L entry on the modification date. The monthly entry simply switches to the new straight-line figure, and the deferred rent schedule is rebuilt from the balance forward.

Termination: Instead, suppose the tenant terminates at the end of year 3 and pays a $100,000 termination fee. The deferred rent receivable of $28,374.48 will never be collected through rent, so it is written off against the fee:

Any unamortised initial direct costs ($45,000 − 36 × $750 = $18,000) are written off to expense in the same period. The security deposit is returned, net of any deductions the lease allows.

Setting up lessor entries in NetSuite

Every entry above is a rule applied to a lease record, and the reason lessor accounting goes wrong in practice is that the rules live in a spreadsheet next to the ledger rather than in it. When lease accounting runs inside NetSuite, the lease record holds the rent schedule, the incentive, the initial direct costs and the classification, and the system generates the monthly entries from those fields.

That means: the straight-line revenue amount is computed once from the schedule and posted every period; the deferred rent receivable is a subledger balance per lease that must tie to zero at expiry and can be reported for any lease at any date; incentives and initial direct costs amortise on their own schedules against the accounts above; variable revenue posts to its own accounts from the billing side (CAM estimates monthly, percentage rent when sales are entered, true-ups at reconciliation); a collectibility flag on the lease switches the revenue rule to cash basis and reverses the receivable; and a modification creates a new schedule from the modification date with the carried-forward balance.

The reporting that auditors ask for falls out of the same structure: a deferred rent roll-forward by lease, the straight-line vs cash variance by period, and the IDC and incentive amortisation schedules. That's how RIOO's property accounting on NetSuite treats lessor accounting: as lease data producing entries, not entries reconstructed from memory each month. The test for any system: pick a lease, change its start date by one month, and see whether every downstream entry moves with it. If someone has to re-key the schedule, the rules aren't in the system.

Frequently asked questions

Q1. Does a lessor record a right-of-use asset under ASC 842?
No. Right-of-use assets and lease liabilities are lessee concepts. A lessor with an operating lease keeps the underlying property on its balance sheet, continues to depreciate it, and recognises lease income straight-line over the term.

Q2. What is deferred rent for a lessor?
Deferred rent, or the straight-line rent receivable, is the cumulative difference between straight-line lease revenue and the cash rent billed. It builds when cash rent is below the straight-line amount, unwinds when cash rent is above it, and must reach zero at the end of the lease.

Q3. How does a lessor account for initial direct costs under ASC 842?
Incremental costs of obtaining the lease, such as leasing commissions, are capitalised and amortised over the lease term on the same basis as lease income. Costs that would have been incurred regardless of whether the lease was obtained, such as internal salaries and legal fees, are expensed as incurred.

Q4. How are lease incentives treated by the lessor?
A payment to the tenant that is a lease incentive is netted against total lease payments, reducing straight-line lease income over the term. If the payment instead funds improvements the lessor owns, it is capitalised as a leasehold improvement and depreciated, and lease income is not reduced.

Q5. Is CAM income straight-lined under ASC 842?
No. CAM recoveries are variable payments for non-lease components (or combined with the lease component under the practical expedient) and are recognised as the underlying costs are incurred and billed. Only fixed lease payments are straight-lined.

Related reading

• NetSuite lease accounting: ASC 842, IFRS 16 and property compliance
• How to set up straight-line rent calculations with GAAP compliance
• What is a tenant improvement allowance and how is it accounted for
• TI allowance vs rent abatement vs free rent