Update clarifies guidance for lessor costs in leases standard

The Financial Accounting Standards Board (FASB) on Dec. 10, 2018, published three narrow updates to its wide-ranging lease accounting standard aimed at providing relief to equipment and property lessors as they implement the new accounting standard.

Accounting Standards Update (ASU) No. 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors, offers relief in three areas: the accounting for sales, use and similar taxes; the accounting for other costs paid by a lessee that may benefit a lessor; and variable payments when contracts have lease and non-lease components.

“The ASU addresses these issues to help lessors with their implementation and ongoing application of the leases standard without compromising information provided to users of financial statements,” FASB Chairman Russell Golden said in a statement.

The update is based on a proposal the FASB issued in August via Proposed ASU No. 2018-260, Leases (Topic 842) Narrow-Scope Improvements for Lessors. The FASB released the proposal to answer questions from landlords renting out real estate and companies renting equipment to customers about applying some parts of the board’s lease accounting standard.

The update is effective at the same time as the board’s sweeping new lease accounting standard, published in February 2016 as ASU No. 2016-02, Leases (FASB ASC 842). The standard goes into effect for public companies in 2019 and for private companies in 2020, but can be adopted ahead of time.

The Dec. 10, 2018, update will allow lessors to avoid what they said was a complex exercise to evaluate whether sales and other similar taxes are costs of the lessor or the lessee — a process that lessors said could be burdensome for businesses that operate across multiple taxing jurisdictions. Instead, lessors will account for these costs as if they are lessee costs and exclude these costs from being reported as lease revenue with an associated expense, the FASB said.

Lessors also will be able to exclude from lessor payments costs that a lessee pays directly to a third party, such as property taxes and the cost for insuring a leased piece of property or equipment. When lessors pays these costs themselves and get reimbursed by a lessee, the costs will be accounted for as variable payments. A lessor will record those reimbursed costs as revenue, the FASB said.

In addition, the update clarifies how a lessor should account for variable payments in a lease that include lease and nonlease components. The break clarifies that variable payment amounts related to lease and nonlease components of a transaction need to be allocated between the contract components when the changes in facts and circumstances on which the variable payment is based occur. The amount of variable payments allocated to the lease components must be recognized as income in profit or loss, as prescribed in the new lease accounting standard. For the nonlease component, the amount of variable payment should be recognized under other applicable accounting guidance, such as the FASB’s revenue recognition standard, Accounting Standards Codification (ASC) 606, Revenue From Contracts With Customers.

The FASB published its lease accounting standard in February 2016 after years of debate on how best to make businesses convey the rights and obligations they take on when they rent chains of storefronts or fleets of vehicles. The standard will usher in a major change in accounting practice, requiring companies to report most leasing liabilities on their balance sheets for the first time. Proponents of this change say existing accounting rules, which allow most lease liabilities to stay off balance sheets, mask businesses’ debts. While much of the attention on the standard has been on how accounting will change for lessees — businesses that rent heavy machinery, airplanes and real estate — lessors also will be affected.

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