The Financial Accounting Standards Board issued an Accounting Standards Update expected to reduce lessor’s implementation and ongoing costs associated with applying the new leases standard. The ASU also clarifies a specific lessor accounting requirement.

In 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), that establishes the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. Since that time, the FASB has been assisting stakeholders with implementation questions and issues as organizations prepare to adopt the new lease requirements.

“During our implementation outreach, some stakeholders raised concerns about issues facing lessors related to accounting for sales and other similar taxes, certain lessor costs and certain requirements related to variable payments in contracts,” stated FASB Chairman Russell G. Golden. “The ASU addresses these issues to help lessors with their implementation and ongoing application of the leases standard without compromising information provided to users of financial statements.”

Specifically, the ASU 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.