FASB Issues Narrow Improvements to Leases Standard
To cut costs lessors have when implementing its leases standard, the Financial Accounting Standards Board (“FASB”) has issued Accounting Standards Update (“ASU”) No. 2018-20, Leases (Topic 842)-Narrow-Scope Improvements for Lessors. The standard addresses three issues lessors face when applying ASU No. 2016-02, Leases (Topic 842):
- Taxes collected from lessees:ASU No. 2018-20 gives lessors the option to review whether particular sales taxes and other taxes are lessor or lessee expenses. Lessors can now account for such expenses as lessee costs and omit the costs as lease revenue with a related expense.
- Certain lessor costs lessees directly pay: ASU No. 2018-20 requires lessors to omit costs paid by lessees directly to third parties from variable payments and revenue. Lessors must also account for costs omitted from the consideration of a contract paid by the lessor and compensated by the lessee as variable payments. Additionally, a lessor will report such reimbursed expenses as revenue.
- Disclosure of variable payments for contracts with lease and nonlease components: ASU No. 2018-20 requires lessors to distribute certain variable payments to the lease and nonlease components when the variable payments change. Thereafter, the variable payments distributed to the lease components must be reported as income in profit or loss according to ASU No. 2016-02, and the variable payments distributed to nonlease components must be reported according to other accounting guidance (e.g., revenue from contracts with customers).
The standard is effective with ASU No. 2016-02. Early adoption is permitted. If adopted early, the effective date is the same as the leases standard.