The Financial Accounting Standards Board has issued an accounting standards update to clarify how to apply the new lease accounting standard to land easements, simplifying adoption of the standard for some easements.

Land easements, often referred to as rights of way, represent the right to use, access or cross someone else’s land for a particular purpose. Land easements are often used by utility and telecommunications companies, for example, when they need to take a small strip of land—or easement—to bury wires. Not all companies have historically accounted for them as leases.

Some of FASB’s stakeholders had complained that the requirement to evaluate all of their old and existing land easements to see if they meet the definition of a lease under the new standard can be very costly, as they can number in the tens of thousands. They saw little benefit to applying the requirement, believing many of their land easements wouldn’t meet the definition of a lease anyway. Even if they did meet the definition, many of the easements are prepaid, so they’re already recognized on the balance sheet.

The new accounting standards update addresses this problem by offering an optional practical expedient for the transition that, if elected, wouldn’t require an organization to reconsider its accounting for existing land easements that aren’t currently accounted for under the old leasing standard. The update also clarifies that new or modified land easements should be evaluated under the new leasing standard, once an entity has adopted it.

“The new ASU reduces the cost of adopting the new leases standard for certain land easements,” noted FASB Chairman Russell G. Golden in a statement. “Additionally, it helps ensure that companies can make a successful transition to the standard without compromising the quality of information provided to investors about these transactions.”

FASB chairman Russell Golden
FASB chairman Russell Golden

FASB initially proposed the changes last September (see FASB proposes lease accounting changes for land easements). The lease accounting standard takes effect for public companies at the end of the year and for private companies at the end of next year. It's one of the major convergence projects that FASB has been working for years on harmonizing with the International Accounting Standards Board. While both the U.S. GAAP and International Financial Reporting Standards version of the leases standard differ in some respects, both the U.S. GAAP and IFRS versions of the standard will put operating leases on the balance sheets of companies for the first time.

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