Changes are coming that may make implementing the new leasing standard easier. The new standard changes how many lessees record leases on their balance sheet and will require lease accounting updates for lessees and their lessors. It begins its rollout in the 2019 calendar year, but many are already taking a look at what adopting the new standard will take. The extent of the changes will require a lease-by-lease analysis to determine where accounting needs to be updated.

The Financial Accounting Standards Board (FASB) is aware that the new standard will be time-consuming to adopt. On Nov. 29, 2017, it met to discuss how the new guidance could be simplified to make implementation easier. Board members boiled potential simplifications down to three core areas: transition method, lessor accounting, and accounting for land easements.

Transition to the Standard

In addition to the accounting changes, entities will be contending with a time-consuming transition method to the new standard. The original accounting standard update to ASC Topic 842, Leases, requires entities to apply the standard to the earliest comparative period presented in the financial statement in the year of adoption and take a cumulative effect adjustment to retained earnings. The FASB is proposing that instead, entities will only apply the new standard prospectively to financial periods that begin after the standard's effective date, which is Dec. 15, 2018, for public companies, and Dec. 15, 2019, for nonpublic business entities.

Making the standard purely prospective will mean that entities will use previous leasing guidance, including disclosure guidance, for comparative periods presented that took place prior to the effective date.

Practical Expedient Created for Lessors

Lessors are required to separate nonlease components from lease components in the new standard. The FASB is proposing a practical expedient that would allow lessors to account for lease and nonlease components as a single lease component if the timing and the pattern of revenue recognition is the same for both, and if the combined lease component meets the definition of an operating lease. Lessors would apply the practical expedient based on class of underlying asset and would disclose that they used the practical expedient on those underlying assets as part of their reporting.

Practical Expedient Created for Land Easements

The FASB also discussed its proposed accounting standard update for leases of land easements, which clarifies that land easements should be evaluated under the new leasing standard and provides some relief related to the transition of current land easements to the new standard. It decided to change the language to clarify that the practical expedient could only be used for land easements that are scoped out of the current lease guidance in ASC Topic 840, Leases, and decided to issue the final accounting standards update.

Leasing Guidance Not Getting an Update

The three above items were not the only elements of the new standard the FASB discussed at its meeting. Members reviewed requests from financial statement preparers regarding leases with 100 percent variable payments, short-term leases, foreign currency considerations, land leases, the definition of incremental borrowing rate, and certain private company disclosures, and decided not to make any additional changes to the guidance.

What Comes Next

The FASB will release a proposed accounting standards update with the changes and allow for a 30-day comment period of the proposed changes. If approved, the changes would be effective at the same time as the leasing standard.

For more information about the changes, please contact Heather Winiarski or Hal Hunt of MHM's Professional Standards Group. Heather can be reached at, and Hal can be reached at

Published on December 12, 2017