FASB on Monday issued an Accounting Standards Update (ASU) that clarifies how to apply the new leases standard when accounting for sales taxes, certain lessor costs, and certain requirements related to variable payments in contracts.
ASU No. 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors, modifies ASU No. 2016-02, Leases (Topic 842). ASU No. 2018-20 should reduce lessors' implementation and ongoing costs related to the new leases standard, according to a FASB news release.
"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 said in the release.
The ASU issued Monday does the following:
- Allows lessors to make an accounting policy election to not evaluate whether certain sales taxes or other similar taxes are lessor costs or lessee costs. Instead, lessors should account for those costs as if they are lessee costs and exclude them from being reported as lease revenue with an associated expense.
- Requires lessors to exclude from variable payments, and therefore 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. Lessors will record those reimbursed costs as revenue.
- Changes the method for recognizing variable payments for contracts with lease and nonlease components. Lessors are to allocate certain variable payments to the lease and nonlease components when the changes in facts and circumstances on which the variable payment is based occur (previously, the new leases standard required lessors to recognize those payments). 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 the new revenue recognition standard.
— Jeff Drew (Jeff.Drew@aicpa-cima.com) is a JofA senior editor.