The Financial Accounting Standards Board has finalized a change to the pending new lease accounting standard meant to make it easier for companies to transition to the new requirements.
FASB issued Accounting Standards Update No. 2018-01 to approve a practical expedient that simplifies and reduces the work companies must do to implement the new lease accounting standard with respect to certain land easements. The new leases standard to bring virtually all leases assets and related liabilities on to corporate balance sheets takes effect Jan. 1, 2019, for calendar-year public companies.
The newest update to the Accounting Standards Codification is specifically focused on certain land easements, which are commonly called rights of way in many business settings. Easements represent the right to use, access, or cross another entity’s land for some specific purpose. They are common in the utility and telecommunications sectors, for example, to facilitate access for transmission wires or pipelines.
The new lease accounting standard generally requires companies to evaluate and account for such arrangements as leases, but companies preparing to adopt the standard called FASB’s attention to historic accounting which has not regarded such arrangements as leases. Companies appealed to FASB that they may have tens of thousands of such arrangements, many of which likely would not qualify as leases under the new standard, making it a costly exercise that would produce limited benefit.
As such, FASB modified the rules to say companies can elect an optional practical expedient that relieve them of the requirement to consider under the new leases standard any existing land easements that are not accounted for as leases under historic rules. The new standard clarifies, however, that any new or modified land easements going forward from the date of adopting the new leases rules should be accounted for under the new rules.
The board still has a separate project under way that will make even further, more significant simplifications to the leases standard. FASB is accepting comments through Feb. 5 on a proposal to allow companies upon adoption of the new leases rules to apply the accounting only to lease obligations that exist and go forward from the Jan. 1, 2019, effective date.
That means companies would not be required to restate historic periods in financial statements to reflect the new accounting, instead adjusting the opening balance to retained earnings in the period of adoption and leaving investors to rely on historic footnote disclosures for any interest they have in comparability with earlier periods. FASB said companies have reported significant operational challenges with applying the new rules to historic periods, in part due to challenges transitioning to new information systems to perform the new accounting.
That proposal also aims to give lessees some relief from a requirement to separately recognize lease and non-lease components that are folded together into contracts with customers. Entities that elect that option would be required to provide some additional disclosures.