Late in 2018, the Financial Accounting Standards Board (FASB) released minor changes to lessor accounting designed to make adopting the new leasing standard easier. As lessors begin making the required changes to their lease accounting, they will want to ensure they have factored these updates into their implementation plans.
Since the release of the new leasing standard in 2016, the FASB worked with stakeholders to address key implementation questions. Three key lessor issues emerged from these conversations, which were accounting for:
- Sales and other similar taxes collected from lessees
- Lessor costs paid by lessees
- Recognition of variable payments for contracts with lease and nonlease components
The FASB sought to address these issues with its Accounting Standards Update 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors (ASU 2018-20).
Sales and Other Similar Taxes Collected from Lessees
The new leasing standard requires lessors to analyze sales taxes and other similar taxes (such as use taxes, value-added taxes and some excise taxes) on a jurisdiction-by-jurisdiction basis to determine whether the lessor is the primary party responsible for paying those taxes or whether the lessor is collecting the taxes from the lessee on behalf of a third party. When the lessor is primarily obligated for payment of the tax, the lessor accounts for that tax payment as a lessor cost and includes that amount in lease revenue and costs. When the lessor acts as an agent for a third party, that amount is excluded from lease revenue.
There are nearly 10,000 sales tax jurisdictions to consider, each with its own rules, thresholds, and reporting requirements. Analyzing all of those jurisdictions to determine whether the lessor is collecting sales taxes on behalf of a third party would be extremely time intensive and complex. Lessors voiced concern with the FASB that the requirement provided limited financial reporting benefit because the net reporting of the sales and other similar taxes is zero in the income statement.
A similar concern came up with the revenue recognition standard, and the FASB created an option for companies to elect an accounting policy to exclude sales and other similar taxes collected from customers from the transaction price. In ASU 2018-20, the FASB creates a similar option that allows lessors to elect an accounting policy to exclude sales taxes and other similar types of taxes from the lease cost.
Lessors Costs Paid by Lessees
Lessees may be asked to pay certain lessor costs while they maintain control of an asset. Sometimes these costs are paid directly to the lessor and other times they are paid to a third party on behalf of the lessor. In either case, the lessor reports these costs as revenue and expenses.
Determining the amount of costs paid by the lessee to a third party may be time consuming in certain scenarios, particularly when there are lessee-specific factors that influence these costs. Lessors also raised concerns that the reporting requirement provides limited value to financial statement users because the net effect is zero in the income statement.
The FASB ruled that lessors can exclude lessor costs paid directly to third parties by lessees from lease revenue. Costs paid directly to a third party by the lessor that are reimbursed by the lessee will be accounted for as variable payments.
Recognition of Variable Payments in Contracts with Lease and Nonlease Components
Lessors are required to recognize certain variable costs in the period in which the facts and circumstances of the variable payment change, regardless of whether the underlying lease contains both lease and nonlease components. ASU 2018-20 provides additional clarity for these variable payments by requiring lessors to allocate the variable costs to their respective lease and nonlease components during that period. Once the variable payments have been allocated, the lessor will then follow the appropriate recognition guidance for lease and nonlease components. For nonlease components, lessors will generally be following the guidance in ASC Topic 606, Revenue from Contracts with Customers.
Review Changes Closely
The updates in ASU 2018-20 are effective at the same time that lessors adopt the leasing standard. If an entity has already adopted the leasing standard, it should apply the updates in ASU 2018-20 in either the first reporting period ending after the issuance of the update (i.e., after Dec. 31, 2018) or the first reporting period beginning after the issuance of the update (starting Jan. 1, 2019).
For more information about how these changes affect your organization, contact us today.
Published on January 22, 2019