This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.
The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox.

Journal entry — FASB concludes deliberations on proposed accounting standards update on narrow-scope improvements for lessors

Published on: Nov 01, 2018

At its meeting on October 31, 2018, the FASB concluded deliberations on its proposed Accounting Standards Update (ASU)1 related to the narrow-scope improvements for lessors under ASC 842.2 This journal entry includes a summary of the tentative decisions reached and related discussion at the meeting for the following issues:3

  • Sales taxes and other similar taxes collected from lessees.
  • Lessee-paid and lessee-reimbursed costs.
  • Recognition of variable payments for contracts with lease and nonlease components.
  • Transition and effective date of the final ASU.

Lessor Accounting Policy Election for Sales Taxes and Other Similar Taxes Collected From Lessees            

The Board tentatively affirmed its decision to permit lessors, as an accounting policy election, to “exclude from the consideration in the contract and from variable payments not included in the consideration in the contract all collections from lessees of taxes within the scope of the election.”4

The scope of the proposed election includes “all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific lease revenue-producing transaction and collected by the lessor from a lessee (for example, sales, use, value added, and some excise taxes).” The Board discussed and affirmed that “[t]axes assessed on a lessor’s total gross receipts or on the lessor as owner of the underlying asset shall be excluded from the scope of [the] election.”

Further, the Board specifically discussed that a lessor need not evaluate “whether certain sales taxes and other similar taxes are costs of the lessor . . . or costs of the lessee.” This concept is consistent with the other tentative decisions detailed below.

Connecting the Dots

Connecting the Dots

Many respondents to the proposed ASU requested that the scope of the accounting policy election for sales taxes and other similar taxes be expanded to include property taxes. The Board decided to address stakeholder concerns on accounting for property taxes through the requirements on lessee-paid and lessee-reimbursed costs (detailed below). That is, property taxes continue to be outside of the scope of the accounting policy election for sales taxes and other similar taxes. This is because property taxes are assessed on the asset as opposed to the sale of the asset.

Accounting Requirements by Lessors for Lessee-Paid and Lessee-Reimbursed Costs

The Board tentatively decided to “exclude from variable payments lessor costs paid by a lessee directly to a third party.” That is, a cost which is lessee-paid directly to a third party would not be accounted for as a lessor cost, and thus would not be reported by the lessor as lease revenue with a corresponding expense (i.e., reported on a net basis).

In response to comment letter feedback requesting expansion of the scope of the proposed amendments to lessee-reimbursed costs, the Board tentatively decided that costs reimbursed by a lessee to the lessor should be accounted for as a lessor cost. That is, a lessor would not need to evaluate whether such costs are lessee costs or lessor costs; rather, a cost which is lessee-reimbursed to the lessor would be accounted for as a lessor cost and reported by the lessor as lease revenue with a corresponding expense (i.e., reported on a gross basis).

Connecting the Dots

Connecting the Dots

The tentative decisions reached impose accounting requirements (as opposed to accounting policy elections) on costs which are lessee-paid or lessee-reimbursed. Accordingly, the presentation of all lessors’ income statements for these costs will be determined on the basis of the contractual provisions of whether the lessee or the lessor pays the third party. That is, a lessor’s income statement will include lease revenues and expenses when a lessee reimburses the lessor (thus, the lessor ultimately pays the third party), but will exclude lease revenues and expenses when a lessee pays directly to the third party.

The Board’s initial intent of the proposed amendments was to make the standard more operable for lessors when there is uncertainty in the amount that is ultimately paid for these types of costs. To achieve this result, and on the basis of stakeholder feedback, the Board’s tentative decisions will likely result in more lessee-paid costs meeting this condition without the “readily determinable” hurdle. As a result, under the tentative decisions, more costs will be excluded from lease revenues and expenses as compared to the proposed ASU.

Recognition of Variable Payments for Contracts With Lease and Nonlease Components

The Board tentatively affirmed its decision to amend ASC 842-10-15-40 to clarify that variable payments for contracts with lease and nonlease components should be allocated (rather than recognized) when the changes in facts and circumstances on which the variable payment is based occur. Further, the Board decided to clarify how variable payments are allocated to ensure alignment with the guidance in ASC 606-10-32-40, which provides specific requirements for allocating variable consideration if certain criteria are met. 

Transition and Effective Date

The Board tentatively decided to apply the proposed amendments for sales taxes and other similar taxes collected from lessees and for lessee-paid and lessee-reimbursed costs to all existing and new leases.

If an entity has not yet adopted ASU 2016-025 on the date of issuance of the final ASU, the Board tentatively decided to align the effective date of the final ASU with that of ASU 2016-02.

If an entity has already adopted ASU 2016-02 on the date of issuance of the final ASU, the Board tentatively decided to provide an election to apply the ASU as of either (1) the lessor’s first period ending after the issuance of the final ASU or (2) the lessor’s first reporting period following the issuance of the final ASU. For example, if the final ASU is issued on December 17, 2018, and a calendar-year-end entity had adopted ASU 2016-02 as of January 1, 2018, the entity could apply the final ASU in the financial statements presented as of either (1) December 31, 2018, or (2) March 31, 2019. In addition, an early adopter could elect to apply the ASU prospectively or retrospectively.

Next Steps

The Board expects to issue the final ASU in December 2018.

See the meeting handout and summary of tentative Board decisions for additional information.

____________________

1 FASB Proposed Accounting Standards Update, Narrow-Scope Improvements for Lessors.

2 For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s “Titles of Topics and Subtopics in the FASB Accounting Standards Codification.”

3 Before the issuance of the proposed ASU, at its meetings on March 28, 2018, and July 25, 2018, the FASB discussed the lessor issues identified herein. For a summary of the FASB’s discussions at those meetings, see Deloitte’s March 30, 2018, and July 27, 2018, journal entries. Further, for a summary of the proposed ASU, see Deloitte’s August 16, 2018, journal entry.

4 Quotes are from the meeting handout.

5 FASB Accounting Standards Update No. 2016-02, Leases.

Deloitte Accounting Journal Entry default image Image

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.