Oct 13th 2017
The Financial Accounting Standards Board (FASB) is proposing an update to land easements that includes determining whether easements are leases.
After FASB issued Accounting Standards Update 2016-02, Leases (Topic 842) in February 2016, stakeholders asked how it applies to land easements. In reply, the FASB has issued Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842.
Easements, which also are known as rights-of-way, are accounted for in a variety of ways. The FASB notes that Topic 840, Leases; Topic 350, Intangibles—Goodwill and Other; and Topic 360, Property, Plant and Equipment are all applied.
Entities that don’t currently use Topic 840 for land easements have told the board that evaluation of existing easements in accordance with Topic 842 to determine if they meet the definition of a lease would be complicated and expensive.
The board also has heard that the benefits of applying Topic 842 to existing land easements would probably be limited because the easements don’t meet the definition of a lease in Topic 842. Otherwise, if they do, the easements are prepaid and already recognized on the balance sheet.
So, the proposed update seeks to clarify that easements should be evaluated under Topic 842 and address stakeholder concerns about the expense and complication in applying Topic 842 not previously addressed by Topic 840 by providing an optional transitional expedient.
As a result, the proposed update would affect land easements that exist or expired before Topic 842 takes effect, as long as an entity doesn’t apply Topic 840 to the easements.
Comments are due by Oct. 25 and can be sent in one of the three ways described in the proposed update.
Here are the key provisos of the proposal:
- Land easements must be assessed under Topic 842 to determine if the arrangements are or include a lease.
- The proposed amendments would permit an entity to elect a transition practical expedient to not apply Topic 842 to easements that exist or expired prior to the effective date and that weren’t previously assessed under Topic 840.
- An entity would have to apply the expedient consistently to all of its existing or expired easements that weren’t previously assessed under Topic 840.
- An entity would continue to apply its current accounting policy for accounting for easements that existed before the effective date of Topic 842.
- Once Topic 842 is adopted, an entity would apply it prospectively to all new or modified easements to determine if they should be accounted for as a lease.
- The proposed update would amend Example 10 (paragraphs 350-30-55-29 through 55-32) of Subtopic 350-30, Intangibles—Goodwill and Other—General Intangibles Other than Goodwill.
The proposed update would clarify that an entity should determine if easements are leases according to Topic 842 before applying the guidance in that example.
The proposed amendments would affect those in Update 2016-02, which aren’t yet effective but can be adopted early, and Example 10 of Subtopic 350-30. The effective date of the proposed amendments would be the same as Update 2016-02.