December 12, 2017
The Financial Accounting Standards Board (FASB) has opted to ease the burden of implementing its leases standard for preparers, and these recent changes target land easements and separation of non-lease and lease components for lessors.
Land easements will be addressed in an upcoming final Accounting Standards Update (ASU) that provides an optional transition practical expedient. If elected, it would not require an organization to reconsider accounting for existing land easements that are not currently accounted for under Topic 840, Leases.
Further, new or modified land easements will be evaluated under Topic 842, Leases: Land Easement Practical Expedient for Transition to Topic 842, once effective.
Here’s the back story.
The issuance of ASU No. 2016-02, Leases (Topic 842) in 2016 was intended to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet, and disclosing key facts about leasing transactions.
In the process of preparing to adopt Topic 842, organizations have asked about how it applies to land easements i.e. rights of way that affect the right to use, access or cross someone else’s land for a specific purpose. Right now, there is no uniformity in accounting for easements. Some organizations will apply Topic 840, Leases, while others will use Topic 350, Intangibles – Goodwill and Other; or Topic 360, Property, Plant and Equipment.
Organizations have told the FASB that it would be expensive and complicated to evaluate all land easements in accordance to Topic 842. They argued that applying the topic would be limited because the easements wouldn’t meet the definition of a lease in that topic.
As a consequence, the board in August declared that new or modified land easements should be evaluated under Topic 842 starting on or after it takes effect. Further, the board opted to address concerns by providing an optional transition practical expedient.
Thus, a second ASU with a 30-day comment period will be drafted to address the transition approach and separation of non-lease components from lease components for lessors.
It will add a transition option for Topic 842 that would allow an entity to not provide comparative period financial statements. Rather, the entity would apply the transition provisos of the leases standard at its effective date.
The proposed ASU also would add what the FASB describes as a practical expedient that would allow lessors not to separate non-lease components from related lease components if certain conditions are met. The expedient could be elected by a class of underlying assets. If elected, certain disclosures would be required.