Just as the massive rules on revenue recognition required some tweaking as companies prepared to implement them, so apparently do the new rules on lease accounting.
The Financial Accounting Standards Board has issued a proposed update to accounting standards to clarify how the new standard on lease accounting applies to land easements. Commonly referred to as rights of way, land easements represent rights to use or access someone’s land for a specified purpose.
The FASB says companies currently account for land easements in different ways, making comparability difficult for users of financial statements. Some account for easements as leases, but some regard them as intangible assets and account for them under that area of GAAP. Some even refer to guidance on accounting for plant, property, and equipment, the board says.
The proposed change to accounting standards would say companies should evaluate easements within the scope of the new standard on leasing, which brings virtually all leased assets and related liabilities on to corporate balance sheets, for public companies beginning in 2019. The FASB says it’s heard feedback that doing so would be complex and difficult in some cases, especially if a company has many such arrangements that have existed for many years.
FASB proposed ASU would make it clear companies should evaluate easements under the new accounting guidance. It also provides an “optional transitional expedient” where doing so would be unnecessarily burdensome.
The proposal explains where companies may elect not to apply the new guidance in cases where they have not evaluated easements as leases historically. It makes clear, however, that all new contracts or arrangements on a go-forward basis must be evaluated under the new lease accounting guidance.
Russ Golden, chairman of the FASB, says the board has heard and is responding to concerns about application, cost, and complexity of the new rules to easement. “We encourage stakeholders to review the proposed ASU and share their views on whether they think its provisions would address the issues raised,” he said in a statement.