Leases – What You Need to Know About the Changes Part 6: Other Items
By Benjamin R. Ripple, CPA, Partner
Since the initial issuance of the new lease standard, FASB has issued several accounting standard updates to clarify and improve the original standard based on comments from stakeholders. Unfortunately, none of those improvements were to revert back to the old way of doing things that everyone is used to. In this article, I will go through some of the adjustments to the original lease standard in case any of them affect you.
The first update that I wanted to briefly touch on is Accounting Standard Update (ASU) 2018-01. This update relates to land easements (also commonly referred to as right of ways). This update provides a practical expedient that allows an entity with land easements that were not previously accounted for as leases to exclude those land easements from consideration under the new lease standard.
The next update I wanted to go through is ASU 2018-10. This update specifically addresses 16 issues related to the new lease standard. Some of these issues were as simple as correcting cross references, but some had a little more substance. Among those, the update clarifies that the rate implicit in the lease should never go below zero. This seems obvious, but for lessors some sales type leases have significant variable payments that could result in a negative rate implicit in the lease.
Another point of clarification related to lessor accounting for a lessee exercising an option to renewal or purchase the underlying asset: the question was whether or not this should be considered a modification of the lease if the lessor had included the exercising of the option in his or her original assumptions. The update clarifies that exercising an option would not be considered a modification that would require reassessment if the exercising of the option was already assumed in the original calculations.
The standard also clarified that variable lease payments based on an index do not require re-measurement on the lease. There are a handful of additional clarifications included in this update. You should look through the summary to see if any will affect you.
ASU 2018-11 provides additional guidance on comparative reporting at the adoption of the new standard and provides lessors with guidance on separating lease and non-lease components in a contract and allocating consideration to the components. The transition guidance provides the option to recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption instead of restating back to the earliest period presented in the financial statements.
The guidance in 2018-11 for separating lease and non-lease components allows lessors the option to not separate non-lease components from the associated lease components if the components follow the same timing and pattern of transfer and the lease is classified as an operating lease.
Finally, ASU 2018-20 provides improvements and clarification for lessors for sales and similar taxes collected from lessees, lessor costs paid by lessee directly to a third party, and recognition of variable payments for contracts with lease and non-lease components. The update allows stakeholders to exclude all sales and similar taxes from the transaction price of the lease. The update also allows stakeholders to exclude all costs paid directly by a lessee to a third party from variable payments. The update also clarified language relating to variable payments for contracts including lease and non-lease components to improve consistency of application of the standard.
As with everything related to the leases, I encourage you to take a moment (well, several moments) to read through the standard updates and discuss any questions you have now with your accounting providers to ensure as smooth a transition as possible when the new standard goes into effect.
Benjamin R. Ripple Partner, Assurance Practice Leader, CPA
Ben is a partner in BRC’s assurance services. Since starting his career in 2001, Ben has worked with clients ranging from family-owned companies, to multinational corporations, to not-for-profit and governmental entities requiring A-133 audits. Ben’s industry experience includes: Manufacturing and distribution Hospitality, including restaurants and hotels Investment companies Governmental and not-for-profit entities Affordable housing […]