Review of leases standard to take place as implementation questions mount

The FASB by early December plans to discuss questions that have arisen since it published its much-watched lease accounting standard in early 2016.

Four groups in the last month have sent letters to the FASB asking for clarifications about complying with the standard or requesting breaks on some requirements in Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842).

The requests have ranged from asking the board to make it easier for companies to make the transition to the new standard to asking the board to clarify how landlords should consider common area maintenance charges in rent payments. Other requests asked for changes to the disclosure rules about leases paid in a foreign currency and short-term lease expenses.

The FASB plans to address the questions in late November or early December, a FASB spokesperson said.

Two groups representing real estate companies called on the FASB to eliminate a requirement in the standard that would make landlords break down rent payments into the cost to lease the real estate itself and the cost for common maintenance services such as landscaping or security. The groups — one representing commercial real estate investment trusts (REITs) and the other representing developers of apartment houses — told the FASB that landlords typically include what the real estate industry calls common area maintenance charges when they calculate the total rent. Separating the components would take too much work for a small benefit, they said.

“The separate presentation, either on the face of the financial statements or as further disclosures in the footnotes, of an allocation of common amenity and other common maintenance activity components within the lease is not information sought or used by the investor or analyst community, and would provide no additional benefits to financial statement users as compared to current disclosures, while multifamily lessors would incur significant costs to generate and provide such information to conform to the new lease and revenue standards per the current interpretations,” the developers of apartment complexes wrote in a Sept. 29, 2017, letter.

Echoing a Sept. 28 letter from commercial real estate investment trusts, the residential real estate developers asked the board to provide separate implementation guidance for apartment lessors that would not require them to separate common area maintenance charges on the face of the income statement and not require them to follow the disclosure rules in the FASB’s separate revenue recognition standard, Topic 606, Revenue From Contracts With Customers, for the charges to be reported as a nonlease performance obligation.

The American Petroleum Institute (API) and Financial Executives International (FEI) asked the FASB to consider eliminating what is called the retrospective transition method as companies adopt the new lease standard. Retrospective transition requires businesses and organizations to show past results using the new accounting so investors and analysts can make clear comparisons between the current reporting period and prior periods.

“Not only would retrospective reporting cause significant encumbrance for companies, it would not provide investors or other stakeholders with new information,” the API wrote on October 16. “As a practical expedient to the application of the standard, API supports the elimination of retrospective reporting or making the requirement optional.”

The API and FEI also asked the board to scale back some of the disclosure requirements in the accounting standard. The FEI said disclosures about short-term lease expense and disclosures about geographic location of leases would require companies to track down a large number of low-value leases, resulting in limited value to investors and analysts. The group also asked the board to allow companies to disclose overseas leases in foreign currency instead of having to convert the currency, which will likely require manual data entry.

In July, the API asked the FASB to allow companies an extra two years to comply with the standard. A delay of the standard, however, is off the table at the moment, the FASB spokesperson said.

The leases standard goes into effect for public companies in 2019. It calls for a significant change to accounting practice for leases, requiring companies to recognize on their balance sheets the assets and liabilities associated with rentals such as offices, factories, airplanes, and heavy equipment. The new accounting is expected to make company balance sheets expand.

Companies — and audit firms — in recent months have raised concerns about businesses not being prepared to follow the new lease accounting standard in time for its effective date.

The FASB published the lease standard after years of debate about whether and how companies should report the liabilities associated with leased assets on their balance sheets. Under the existing lease standard, companies only have to record lease obligations on their balance sheets when the arrangements are akin to financing transactions, such as rent-to-own contracts for buildings or vehicles. Few get recorded, however, because of so-called “bright lines” in U.S. GAAP that give the companies room to arrange deals to look like simple rentals. If an obligation is not recorded on a balance sheet, it makes a business look like it is less leveraged than it really is.

For an in-depth analysis of the FASB’s standard for lease accounting, please see Catalyst: US GAAP — Leases, also on Checkpoint.

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