Lease accounting rules get additional tweaks

FASB issued minor amendments, targeted changes, and a proposal addressing lessors' implementation challenges.

FASB continued its efforts to improve its new lease accounting standard, issuing minor amendments, 16 targeted changes, and a proposal designed to reduce costs and make implementation easier for lessors.

Since the new lease accounting standard was issued in 2016, FASB has been monitoring feedback and assisting with implementation questions related to the standard. This dialogue led to the additional actions FASB undertook to improve the standard.

Accounting Standards Update (ASU) No. 2018-11, Leases (Topic 842): ­Targeted Improvements, makes transition requirements less burdensome and provides lessors with a practical expedient for separating nonlease components from lease components.

The standard provides:

  • An option to apply the transition provisions of the new standard at its adoption date instead of at the earliest comparative period presented in its financial statements.
  • A practical expedient permitting lessors to not separate nonlease components from the associated lease component if certain conditions are met.

Meanwhile, the 16 amendments affect narrow aspects of the guidance issued in the lease accounting standard. FASB does not expect the clarifications to significantly affect current accounting practice or create significant implementation costs for most entities.

Issues addressed in the amendments are:

  • Residual value guarantees.
  • Rate implicit in the lease.
  • Lessee reassessment of lease classification.
  • Lessor reassessment of lease term and purchase option.
  • Variable lease payments that depend on an index or a rate.
  • Investment tax credits.
  • Lease term and purchase option.
  • Transition guidance for amounts previously recognized in business combinations.
  • Certain transition adjustments.
  • Transition guidance for leases previously classified as capital leases under Topic 840.
  • Transition guidance for modifications to leases previously classified as direct financings or sales-type leases under Topic 840.
  • Transition guidance for sale and leaseback transactions.
  • Impairment of net investment in the lease.
  • Unguaranteed residual asset.
  • Effect of initial direct costs on rate implicit in the lease.
  • Failed sale and leaseback transaction.

Lessor accounting issues are addressed in Proposed Accounting Standards Update, Leases (Topic 842): Narrow-Scope Improvements for Lessors.

The proposal addresses sales taxes and other similar taxes collected from lessees; certain lessor costs paid directly by lessees; and recognition of variable payments for contracts with lease and nonlease components. The comment deadline for the proposal was Sept. 12.

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ASC Topic 842 is a relatively simple standard that can mean profound changes for organizations with leases. This report examines what makes this standard challenging and describes new ways for CPAs to add value.