FASB issued an Accounting Standards Update (ASU) on Thursday that clarifies the application of the board’s new lease accounting standard to land easements and makes adopting the leases standard easier for some land easements.
Land easements represent the right to use, access, or cross another entity’s land for a specified purpose. For example, utility and telecommunications companies use land easements when they need to take a small strip of land (an easement) to bury wires.
Historically, not all companies have accounted for land easements as leases; meanwhile, some companies have land easements numbering in the tens of thousands. As a result, it could be very costly for some financial statement preparers to comply with the lease accounting standard’s requirement to evaluate all old and existing land easements to determine if they meet the definition of a lease under the new standard.
Undergoing the evaluation for all those land easements would provide limited value because many of those easements would not meet the definition of a lease. Even if they did meet the definition of a lease, many land easements are prepaid and therefore are already recognized on the balance sheet.
ASU No. 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842, addresses these concerns by:
- Providing an optional transition practical expedient that, if elected, would not require an organization to reconsider its accounting for existing land easements that are not currently accounted for under the old lease accounting standard.
- Clarifying that new or modified land easements should be evaluated under the new lease accounting standard once an entity has adopted the new standard.
“The new ASU reduces the cost of adopting the new leases standard for certain land easements,” FASB Chairman Russell Golden said in a news release. “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.”
—Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is a JofA editorial director.