FASB revises leasing standard for lessors

The Financial Accounting Standards Board issued an accounting standards update Monday aimed at reducing the costs for lessors in implementing and applying the new lease accounting standard.

The narrow-scope update also clarifies a specific accounting requirement for lessors. FASB issued the leases standard, also known as Topic 842 in 2016, which would put operating leases on the balance sheets of many companies for the first time. The standards include principles for reporting transparent and economically neutral information about the assets and liabilities arising from leases. Since the issuance of the leasing standard time, FASB has heard questions from its constituents as they try to deal with implementation and issues as organizations get ready to adopt the new requirements.

“During our implementation outreach, some stakeholders raised concerns about issues facing lessors related to accounting for sales and other similar taxes, certain lessor costs, and certain requirements related to variable payments in contracts,” said FASB chairman Russell Golden, in a statement. “The ASU addresses these issues to help lessors with their implementation and ongoing application of the leases standard without compromising information provided to users of financial statements.”

FASB chairman Russell Golden
FASB Chairman Russell Golden

The standards update specifically deals with a number of issues confronting lessors when they apply the leases standard:

  • Sales taxes and other similar taxes collected from lessees. The amendments in the update allow lessors, as an accounting policy election, to not evaluate whether certain sales taxes and other similar taxes are lessor costs or lessee costs. Instead, those lessors will be able to account for those costs as if they are lessee costs and exclude the costs from being reported as lease revenue with an associated expense.
  • Certain lessor costs paid directly by lessees. The amendments related to certain lessor costs require lessors to exclude from variable payments, and thus revenue, lessor costs paid by lessees directly to third parties. The amendments also require lessors to account for costs excluded from the consideration of a contract that are paid by the lessor and reimbursed by the lessee as variable payments. A lessor will record those reimbursed costs as revenue.
  • Recognition of variable payments for contracts with lease and nonlease components. The amendments in the standards update related to recognizing variable payments for contracts with lease and nonlease components require lessors to allocate (rather than recognize as currently required in the new leases standard) certain variable payments to the lease and nonlease components when the changes in facts and circumstances on which the variable payment is based occur. After the allocation, the amount of variable payments allocated to the lease components will be recognized as income in profit or loss in accordance with the new leasing guidance, while the amount of variable payments allocated to nonlease components will be recognized in accordance with other accounting guidance, such as revenue from contracts with customers.
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