FASB Simplifies Provisions in Lease Standard

April 6, 2018

The Financial Accounting Standards Board (“FASB”) has asked its staff to prepare a final draft of an amendment to the board’s lease standard that would simplify how lessors account for specific property leases with recurrent service charges. At its March 28 meeting, FASB members agreed to allow lessors combine receipts from property leases and service income related to those leases by meeting certain requirements.

To be accounted for as one, the lease part of the rental arrangement and the service charges need to be bound by the same transfer between the tenant and the landlord. Also, the lease contracts will have to require a “pattern of transfer” based on time and is within the term of the lease agreement.

Also decided at the meeting is if the charges in the agreement are primarily associated with the lease, lessors would have to consider a lease contract as an operating lease as stated under FASB Accounting Standards Codification (“ASC”) 842, Leases. If the lease component is lesser than the related service charges, however, the contract would be accounted for using FASB ASC 606, Revenue From Contracts With Customers. Lessors would need to review the lease and service aspects of the lease agreement based on the board’s qualitative criteria and would not require a comprehensive analysis.

The FASB’s March 28 meeting concluded talks on the last set of changes under Proposed Accounting Standards Update No. 2018-200, Leases (Topic 842): Targeted Improvements. In addition to reaching decisions on the remaining changes, the FASB will seek public feedback on its proposed amendments to the accounting for costs lessors incur. These costs include sales and property taxes and insurance premiums. Once finalized, the changes can be applied to the first reporting period after being published.