Lease Accounting Proposal to Help Companies with Land Easements

October 2, 2017

Utility and oil and gas companies could receive new guidance from the Financial Accounting Standards Board (“FASB”) to help account for land easements. In Proposed Accounting Standards Update (“ASU”) No. 2017-290, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842, the FASB gives companies with land easements what it calls a transition break.

The transition break allows companies to forgo reviewing dated contract files to determine whether the transactions must be identified as leases and should be accounted for under ASU No. 2016-02, Leases (Topic 842). When the lease standard goes into effect, new easements must be reviewed to determine if they include a lease and will have to follow the new guidance. Companies with land easements that do not follow the guidance under Topic 840, Leases, would receive the transition break.

Businesses that do not identify land easements as leases said they would be burdened by having to examine all their contracts to determine whether they meet the FASB’s new lease definition. They said most contracts are likely not to meet the definition of a lease. Even if the arrangements did, the FASB said many of the companies’ easements are prepaid and already disclosed on the balance sheet.

Comments on the proposal are due Wednesday, October 25. FASB Chairman Russell Golden encourages stakeholders to review the proposal and speak up on whether the amendments address the issues on accounting for land easements.

ASU No. 2016-02 will be effective in 2019 for public companies.