FASB Issues Proposed Changes to Lease Accounting Standard

August 30, 2018

A recently proposed update to the Financial Accounting Standards Board’s (“FASB”) lease accounting standard aims to alleviate the work lessors will have to perform when applying Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). Proposed ASU No. 2018-260, Leases (Topic 842): Narrow-Scope Improvements for Lessors, offers lessors new guidance on the breakout of sales and other similar taxes from their costs, and the recognition of certain expenses and variable payments for lease and non-lease portions of a contract.

Landlords and companies that lease equipment to their customers informed the FASB that the amount of work and analysis required by ASU No. 2016-02 is not worth the benefit of their investors or financial statement readers would receive. For example, lessors said requiring sales and other taxes to be examined by their separate jurisdictions to determine who is primarily obligated to the taxes would be expensive and complicated. As a result, the lessor would record the revenue and expense as the same amount in its income statement, creating a zero net effect on income.

In response, the FASB proposes giving lessors an accounting policy election for sales and similar taxes to exclude taxes from the calculation of lease revenue and related expenses. The accounting policy would be applied to all sales and other taxes included in the policy election. Lessors would not have to account for certain costs that lessees pay for rented equipment when accounting for their leases. Proposed ASU No. 2018-260 also amends FASB ASC 842 and exempts lessors from disclosing variable lease revenue and the related cost as an expense for particular lessor expenses paid by the customer to third parties.

Comments on the proposed amendments are due Wednesday, September 12. If you need assistance with the FASB’s proposal to its lease accounting guidance, Cherry Bekaert is here to help.