FASB Issues Narrow-Scope Improvements to Accounting for Lessors
The FASB has issued Accounting Standards Update (ASU) No. 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors. This ASU is expected to reduce a lessor’s implementation and ongoing costs associated with applying the new leases standard. The ASU also clarifies a specific lessor accounting requirement.
Specifically, ASU No. 2018-20 addresses the following issues facing lessors when applying the leases standard:
Sales taxes and other similar taxes collected from lessees
The amendments in the ASU permit lessors, as an accounting policy election, to not evaluate whether certain sales taxes and other similar taxes are lessor costs or lessee costs. Instead, those lessors will account for those costs as if they are lessee costs and exclude the costs from being reported as lease revenue with an associated expense.
Certain lessor costs paid directly by lessees
The amendments in the ASU related to certain lessor costs require 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. A lessor will record those reimbursed costs as revenue.
Recognition of variable payments for contracts with lease and nonlease components.
The amendments in the ASU related to recognizing variable payments for contracts with lease and nonlease components require lessors to allocate (rather than recognize as currently required in the new leases standard) certain variable payments to the lease and nonlease components when the changes in facts and circumstances on which the variable payment is based occur. 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 revenue from contracts with customers.
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