FASB Proposes Tweaks for Leasing Standard

Published on September 04, 2018

The Financial Accounting Standards Board is proposing to make a number of narrow improvements in the lease accounting standard as public companies get ready for it to take effect at the end of the year.

The proposal aims to reduce some of the costs and implementation headaches of applying the leasing standard. It would also clarify a specific requirement in the standard related to lessor accounting with sales taxes and other similar taxes collected from lessees. The new guidance would allow lessors, as an accounting policy election, to not evaluate whether these taxes are costs of the lessor or costs of the lessee. Instead, a lessor could account for them as costs of the lessee and exclude the amounts from lease revenue and the associated expense.

Another change for lessors involves certain lessor costs paid directly by lessees. The guidance requires lessors to exclude those costs from variable payments, and, thus, from variable (lease) revenue and the associated expense when the amount of those costs is not readily determinable by the lessor.

Another change relates to recognition of variable payments for contracts with lease and non-lease components. The guidance requires lessors to allocate (instead of recognize, as currently required in the new leases standard) certain variable payments to the lease and non-lease components when the changes in facts and circumstances on which the variable payment is based occur. After the allocation, the amount of variable payments allocated to the lease component would be recognized in accordance with the new leasing standard, while the amount allocated to non-lease components would be recognized in accordance with other accounting guidance (such as revenue from contracts with customers).

FASB issued the Leases standard, also known as Topic 842, in 2016, requiring many companies to include their operating leases on their balance sheets for the first time. The standard takes effect for public companies at the end of this year and for private companies a year later. Since releasing the standard, FASB has been helping stakeholders with implementation questions and issues as organizations prepare to adopt the new requirements.

“Through our implementation process on the Leases standard, stakeholders informed us that lessors face certain issues in accounting for sales and other similar taxes, certain lessor costs, and certain requirements related to variable payments in contracts,” said FASB chairman Russell G. Golden in a statement. “This proposed accounting standard provides financial statement preparers relief and clarity in these areas and should help them implement the leases standard.”

FASB is encouraging stakeholders to review the proposal and provide comments by Sept. 12, 2018.

A recent poll by Deloitte found that with under five months until the first compliance deadline, nearly half of executives (49.3 percent) reported that they’re either “very” or “somewhat” concerned about implementing the new FASB lease accounting standard on time, up from 47.1 percent in May 2017. Twice as many executives are feeling more unprepared to comply with the standard (29.5 percent) compared to those who feel prepared (15.4 percent).

(Source: AccountingToday - Audit & Accounting - August 20, 2018)