Financial statement preparers spoke out about issues with implementing the leasing changes under ASC Topic 842, and the Financial Accounting Standards Board (FASB) listened. The FASB recently issued proposed guidance that would simplify three elements of the new leasing standard that will affect lessor accounting.
If implemented, the changes would take effect when the new leasing standard is adopted: 2019 for calendar-year-end public business entities and 2020 for calendar-year-end private entities.
In the accounting update to Topic 842, lessors analyze sales taxes on a jurisdiction-level to determine whether the lessor is primarily responsible for the sales taxes or whether the lessor collects taxes on behalf of a third party. Lessors acting as sales tax "agents" for a third party exclude the sales tax amount from revenue. Lessors that directly pay the tax include the amount of the sales tax in their lease revenue and costs.
With more than 10,000-plus jurisdictions that levy taxes, analyzing sales tax on a jurisdiction-by-jurisdiction basis could be incredibly time consuming. The proposed amendments would allow lessors to elect an accounting policy to exclude sales taxes from lease revenue and costs. The accounting policy would mirror a provision adopted for the new revenue recognition standard that permits reporting entities to exclude sales tax from their transaction price.
Lessor Costs Paid by the Lessee
Lessees may end up paying lessor costs associated with a lease that do not result in any separate transfer of goods or services from the lessor to the lessee. Under the new leasing standard, the lessor reports lessee-paid costs are variable consideration and are reflected as both revenue and expense.
The amount of lessee costs paid directly to third parties on behalf of the lessor, such as property taxes or insurance, may be difficult to determine. For instance a lessor may not have knowledge about the costs of insurance charged for a leased building that may be determined by various lessee factors, such as the tenant's risk profile. Lessors were concerned that the cost of complying with the requirement to determine the amount of the lessee-paid costs in order to include them as revenue and expense would be costly and provide minimal benefit.
To address the issue, the proposed standard creates an exception related to costs paid on behalf of the lessor directly to a third party by a lessee. Under the exception, when those costs are not readily determinable by the lessor, they are required to be excluded from lease payments, thus eliminating a requirement for the lessor to determine the amount of such costs. Similar costs that are reimbursed to the lessor by the lessee would continue to be included in revenue and expense.
Variable Payments for Contracts with Lease and Nonlease Components
Lessors generally follow ASC Topic 842 to account for lease component revenue and ASC Topic 606 to account for nonlease components. As written, the new leasing standard requires lessors to recognize the variable payments for both lease and nonlease components when the facts and circumstances that determine the amount of the payment occur (i.e. for a variable payment based on lessee sales, when the sales occur). Financial statement preparers pointed out that this could lead to lessors recognizing payments for nonlease components before they would under ASC Topic 606. Amendments in the proposed ASU would clarify that the requirement is to allocate the variable payment between the lease and nonlease component, on the same basis as the initial allocation, in the period of the change in the amount. Recognition for the variable payment would occur as appropriate under the applicable guidance, ASC Topic 842 for the leasing component and other applicable guidance (typically ASC Topic 606) for the nonlease component.
Comments on the proposed standard are due to the FASB by Sept. 12, 2018. For further questions about the leasing standard, please contact Hal Hunt of MHM's Professional Standards Group. Hal can be reached at 816.945.5610 or firstname.lastname@example.org.
Published on August 21, 2018