The Financial Accounting Standards Board has taken another step to make the adoption of the huge new standard on lease accounting a little simpler—this time for lessors.
FASB has issued a proposal to update Accounting Standards Codification Topic 842 on leases that is intended to reduce the cost and complexity of implementing the new leasing standard, especially for lessors, or companies that provide property or equipment to lessees via lease contracts. The board earlier approved changes meant to make the accounting easier for lessees, most notably by allowing companies to present earlier periods in financial statements following historic accounting rules.
FASB Chairman Russ Golden says the board learned through implementation activity that lessors had some difficulty understanding how to account for certain aspects of transactions, such as sales tax, other taxes, certain lessor costs, and variable payments. “This proposed accounting standard provides financial statement preparers relief and clarity in these areas and should help them implement the leases standard,” Golden said in a statement.
The tax issue in particular has been tricky for lessors. ASC 842 tells lessors they must analyze sales taxes and other similar taxes by jurisdiction to determine where taxes are the obligation of lessees or lessors and account for them accordingly. Lessors told FASB that exercise is not only costly and difficult to undertake, but pointless because the reporting has no net effect on the income statement of either lessees or lessors.
The proposed Accounting Standards Update would tell lessors they may adopt an accounting policy election to not evaluate whether sales taxes and other taxes collected under lease contracts are costs of the lessor or the lessee. Instead, the lessor could account for them as costs of the lessee and exclude the amounts from lease revenue and related expenses. That’s similar to the approach taken in a practical expedient permitted under the new revenue recognition standard, or ASC 606, the board says.
Where lessors have certain costs that are paid directly by lessees, the proposed new guidance would require lessors to exclude those amounts from variable payments when amounts are not easily determinable. The guidance would also require lessors to allocate certain variable payments to lease and non-lease components when facts and circumstances governing the variability change. After that determination, amounts allocated to non-lease components would be recognized as revenue under the revenue recognition standard.
The proposed update is open for comment through Sept. 12, after which the board will deliberate comments, make any necessary revisions, and make a final decision on issuing it as a final update to ASC 842. The new lease accounting standard was issued by FASB in 2016, and it takes effect for calendar-year public companies on Jan. 1, 2019. Companies are working feverishly to meet that deadline.