The Financial Accounting Standards Board has reached some preliminary decisions about how it will revise rules on leases accounting and hedging to address questions that have surfaced during implementation.
With respect to leasing, the board sifted through feedback to its proposed accounting standards update that would make “targeted improvements” to the pending new standard that will take effect in 2019 to bring all leases on to corporate balance sheets. Most notably, the board tweaked its planned change to the rules around the requirement for lessors to separate lease and nonlease components when accounting for leases.
As a result of comments on the proposal, the FASB determined it will amend the criteria that address the timing and pattern of revenue recognition for the lease and nonlease components and the combined single lease component that must be classified as an operating lease in accordance with the original standard.
The board also determined it will specify that for arrangements that qualify for the practical expedient, a lessor will account for the combined component as a single performance obligation under revenue recognition guidance when the nonlease component is the predominant component. The board also determined it will clarifying that the existence of nonlease components that are not eligible for the practical expedient does not preclude an entity from electing the practical expedient where the lease component and other nonlease components otherwise qualify.
The board also determined it will add a separate project to its technical agenda to address more specific questions from lessors on how to account for certain costs, like sales tax, property tax, and insurance. The FASB offered some suggestions on referencing and following other revenue recognition in the meantime.
With respect to hedging, the board worked through a number of narrow, technical issues with its proposed update to accounting standards to provide some targeted improvements to the guidance. The new standard on hedge accounting takes effect in 2019, but entities are permitted to apply the guidance early, and accounting experts say many are eager to do so to avail themselves of the considerable simplifications provided under the new rules.
The FASB heard a number of technical interpretations regarding the proposal and feedback to the proposal, and determined it will form a technical resource group to monitor certain aspects of implementation.