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FASB plans new expedient for lease accounting

Tammy Whitehouse | August 9, 2017

The Financial Accounting Standards Board is preparing to propose a modification to the pending lease accounting standard to amend the transition guidance.

In a recent FASB meeting, the board decided to modify the transition provisions in Topic 842 of the Accounting Standards Codification, which takes effect for public companies in 2019, for certain land easements that existed before the effective date. The board has instructed its staff to draft an accounting standards update for public proposal and comment.

The board plans to introduce a practical expedient to give companies an option to not apply the new accounting to land easements existing before the effective date, provided the entity does not already apply current lease accounting guidance to those same easements. That means FASB plans to tell entities to continue to apply their current accounting policies, whatever those may be, to accounting for land easements that existed before the new accounting standard takes effect.

Separately, FASB also is planning to edit an example in the Codification related to intangibles other than goodwill to “eliminate a perceived inconsistency” between that example and the new lease accounting guidance.

Public companies are expected to apply the new lease guidance in 2019 to bring virtually all leases on to corporate balance sheets, reflecting assets and liabilities that have long appeared only in footnotes to financial statements. New standards are taking effect both under U.S. GAAP and International Financial Reporting Standards to bring leases on the balance sheet, although the recognition on the income statement will differ under the two separate rule books.

As companies are taking stock of their leases to prepare for the new accounting requirement, they’re finding challenges in identifying exactly what qualifies for lease accounting treatment, says Chris Stephenson, a principal at Grant Thornton focused on the new standard. “The question is becoming: what is a lease?” he says. “What do companies have the right to use, the right to control? And easements is one of those topics that fits into that category.”

The heightened profile of leases as they prepare to take a place on the balance sheet is causing companies to scrutinize more carefully how they’ve classified things in the past, and how they’ll do so under the new standard, says Stephenson. In the classic example, companies are trying to figure out how to treat rights to place exterior building signage or billboards on property they otherwise don’t own or even lease.