Utilities, pipeline operators with land easements gain simplified transition to lease standard

Utilities, oil-and-gas pipeline operators and energy companies holding rights of way to accommodate pipelines or electric wires will get a break when they make the transition to the Financial Accounting Standard Board’s (FASB) lease standard, the accounting board said in an update to U.S. generally accepted accounting principles (GAAP) published on Jan. 25, 2018.

Accounting Standards Update (ASU) No. 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842, allows businesses with rights of way, called land easements, to avoid sorting through years of old contracts to determine if the contracts meet the definition of a lease the FASB established in ASU No. 2016-02, Leases (Topic 842), and fall within the lease standard’s scope.

Once the new standard is in place, businesses and other organizations must determine if new or modified easements have to be recognized as leases. Public companies must apply the standard in 2019.

The FASB offered the relief, which is optional, after energy and utility companies petitioned the board and said it would be costly for them to evaluate their many existing contracts granting them property rights. Furthermore, most land easements are prepaid and recognized on balance sheets.

Randall Hartman, director of accounting at the Edison Electric Institute, the lead trade association for the electric utility industry, endorsed the FASB’s move.

“For our industry, this practical expedient will provide substantial transition relief from the cost and complexity of implementing the new rule as electric companies typically have tens of thousands of land easement agreements, many of which date back several decades,” Hartman wrote in an email to Accounting and Compliance Alert. “We agree with the board’s conclusion that evaluating existing land easements under that new rule would result in substantial implementation costs that would not be justified by the limited benefit.”

Topic 842, Leases, requires companies to evaluate existing contracts to determine if they meet the new definition of a lease. Utilities and pipeline operators told the FASB that many of them obtain property rights through land easements, and most are not currently accounted for as leases. Weeding through the contracts to determine if they meet the definition of a lease could be a large undertaking, they told the accounting board.

A land easement may give a company the right to pass a pipeline through a field or run an electric cable over a farm, while the landowners typically continue to use the property as before.

Businesses that hold land easements sometimes account for them as leases, but others account for them under Topic 350, Intangibles — Goodwill and Other, or Topic 360, Property, Plant and Equipment, the FASB said.

ASU No. 2016-02 was published in February 2016 after a decade of debate, and it requires companies to report on their balance sheets their rented office space, storefronts, vehicles and equipment as assets, and the rent they owe for them as liabilities. The standard defines a lease as a contract or part of a contract that conveys the right to control the use of a rented asset. The concept of control is a key change from the definition of a lease in Topic 840, Leases, which is being replaced by Topic 842, and it means that the customer has both the right to benefit from substantially all of the economic benefits of the asset and the right to direct its use.

Most leases that fall within the scope of Topic 840 will continue to be considered leases under the new standard, but many more arrangements are expected to be captured under the new definition of a lease and will have to follow the new accounting.

Additional analysis of the lease standard can be found in the Accounting and Auditing Update Service [AAUS] No. 2016-15 and SEC Accounting and Reporting Update Service [SARU] No. 2016-13 (March 2016): Special Report: Accounting for Leases—An Explanation and Analysis of Accounting Standards Update No. 2016-02.

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