Next Up: The New Leasing Standard

Spring has sprung, and with the effective date of the new leases standard around the corner (2019 for most calendar year-end public companies), the FASB is springing into action to address implementation questions and concerns. Some have blossomed into issued amendments, while others are in earlier stages of development. Here’s a summary of the recent amendments and proposals.

Fully bloomed: Land easements amendment

In January, the FASB issued an amendment that adds a transition practical expedient that allows companies to avoid having to assess whether any land easements are, or contain, leases if they were not previously accounted for as leases under the old leases standard. Instead, this optional practical expedient effectively grandfathers the prior accounting for these arrangements. However, any land easements entered into or modified after a company adopts the new leases standard would need to be evaluated under the new guidance.

Sprouting developments: January proposals

In March, the FASB reviewed feedback received on its January 2018 exposure draft and approved two additional amendments that will simplify the adoption of the new standard.

The first will ease transition by allowing companies the option to apply the new leasing standard as of the beginning of the period of adoption (i.e., January 1, 2019, for most calendar year-end public companies), without adjusting the comparative periods. This could be a significant time saver for companies as absent this, the guidance currently requires companies to adopt the new standard by applying a modified retrospective approach, which would mean adjusting all comparative periods presented.

The FASB also approved the addition of a new practical expedient that would provide lessors with an option to combine lease and non-lease components when certain criteria are met.

Recently planted seeds: Upcoming proposals

The FASB also discussed operational challenges recently raised by stakeholders related to the presentation of certain lessor costs. Currently, a lessor typically presents revenue net of sales tax and also generally excludes from revenue variable property taxes and insurance costs that are paid directly by a lessee. The new standard requires lessors to quantify these lessor costs and report them as both revenue and expense in the income statement. The FASB tentatively agreed to allow lessors to make accounting policy elections to (1) exclude sales tax collected from the lessee from the transaction price and/or (2) exclude property taxes and insurance costs from variable consideration when those costs are paid directly by the lessee and the uncertainty in the amount paid is not expected to be ultimately resolved. An exposure draft is expected in the upcoming months.

For more insights on the new leasing standard, please visit our CFOdirect lease accounting webpage and read our In brief: The new leases standard made easier for lessors. Follow me on Twitter at @BethPaul_CPA.