Simplified Transition to Lease Standard Offered for Land Easements

February 15, 2018

Thanks to the Financial Accounting Standards Board’s (“FASB”) latest Accounting Standards Update (“ASU”), companies with land easements contracts should have an easier time applying the board’s lease standard. ASU No. 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842, offers a simplified transition to ASU No. 2016-02, Leases (Topic 842), for businesses with the right to use another entity’s land for purposes such as running pipelines or burying transmission wires.

The amendments ensure that businesses can successfully transition to ASU No. 2016-02 without impacting the information investors receive about land easements. The FASB addresses the issue by offering companies an optional transition practical expedient that will not require them to reevaluate their accounting for current land easements that currently unaccounted for under the previous lease standard. The amendments also clarified that once the FASB’s new lease standard is effective, new or modified land easements must be reviewed to determine whether they qualify under the new definition of leases.

ASU No. 2016-02 requires businesses to review their existing contracts to see whether they meet the FASB’s updated definition of a lease. The new lease definition created concern among utilities and pipeline operators since many companies acquire property rights through land easements contracts totaling in the thousands. Most of these agreements are unaccounted for as leases, which could be expensive to businesses when sorting through old land easements to determine if they comply with the new lease definition.

The lease standard becomes effective in 2019 for public companies and 2020 for private companies.