FASB Updates to Lease Standards Simplify Compliance
In response to complaints about the resources and effort required to comply with the new lease standards, FASB announced simplifications that will make compliance easier and less costly.
A final update for land easements, Auditing Standards Update (ASU) 2018-01, was issued in January. On Jan. 5, 2018, FASB released a proposed update for the presentation of prior periods in comparative financials. The proposed update also includes a practical expedient for lessors who have leases containing lease and non-lease components.
The new lease standard announced by FASB, Topic 842, presents those companies who issue GAAP-basis financials with daunting changes. Under the new standard, as I discussed earlier, both operating leases and capital leases will appear on the balance sheet. Under the current standards, only capital leases show up on the balance sheet. For public companies, the standards are effective for fiscal years beginning after Dec. 15, 2018. Private companies will need to implement them for fiscal years beginning after Dec. 15, 2019.
Land Easement Treatment Simplified
As FASB noted, the treatment of land easements is inconsistent. Some entities treat these agreements, which allow the right of way or right to use to land belonging to another, as components of leases. Other entities treat them as real property, while others treat them as intangibles.
The new standard makes treatment of land easements uniform by requiring that they be treated as leases. Under the original standard, this treatment was to be extended to earlier comparative periods presented in financials issued after the entity’s adoption date of Topic 842.
FASB received comments that including existing or expired leases from comparative periods in financials at the date of adoption would be costly, difficult and of little benefit to the users of those financials. Consequently, ASU 2018-01 allows an optional transition expedient.
Companies that did not previously treat land easements as leases can continue using their current method for all leases that exist or that have expired at the date of adoption of Topic 842. The new standard will apply to any new land easements or modifications to existing ones that occur after the entity’s date of adoption.
Entities that don’t adopt this expedient will have to treat all existing and expired land easements as leases in their financials.
Comparative Financials Simplified
As with the treatment of land easements, FASB heard many complaints that implementing the new standard for leases was significantly more costly and time-consuming than expected.
Under the proposed update, entities are not required to apply the new standard retrospectively to the earliest period in their comparative financials at the date of adoption. Instead, entities are allowed to present a balance sheet adjustment to retained earnings showing the cumulative effect of the transition for the period of adoption.
This update doesn’t change how the new standards are applied at adoption, but when the transition will be applied. Beginning in the period of adoption, the comparative prior periods of financials will continue to be reported under the old rules. But any periods after the date of adoption will be reported under Topic 842.
Lease and Non-lease Components Not Required to be Separated
Under the new standards, as originally stated, lessors who include lease and non-lease components in a lease are required to separate these components. For example, an equipment lessor may include a service agreement for the equipment being leased. The lease portion goes on the balance sheet, while the non-lease service component only appears on the income statement.
Lessees however, have the option to elect by class of assets to treat the entire lease as a single lease with no additional disclosures required.
The proposed update would allow lessors to also elect to treat such leases as a single lease. This election is by class of assets. However, in contrast to lessees, this can only be done if the following two conditions are met:
- The timing and pattern of revenue recognition must be the same for both components of the lease.
- The combined single lease must be an operating lease.
Also in contrast to treatment by lessees, lessors will have to make additional disclosures. They will have to disclose this election and the classes of assets for which they are making the election. They must also disclose the general nature of the non-lease components that are being included within the single lease.