FASB Proposal Addresses Sales Tax, Variable Payments and Lessor Costs

On February 25, 2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-02, Leases (Topic 842), to increase transparency and comparability while inviting comments due September 12, 2018. It specifically targets sales tax and other similar taxes collected from lessees, the payment of some lessor costs (including insurance and property taxes) by lessees and the clarification of accounting for variable payments. The proposed rules would require lessors to account for such items “grossed up” as revenue and expense in certain circumstances. It proposes to give relief for some of the items in certain circumstances.

Bill Bosco, advisor to the Equipment Leasing and Finance Association, suggests that all lessors read this proposal and comment as it could have significant negative impact on operations and financial reporting. In his opinion the proposal does not meet the needs of industry. According to Bosco, either the industry should be provided with relief from grossing up the revenue and expense for sales tax, property tax and insurance or they should rethink their model. It is ambiguous as to whether these costs are lessee or lessor costs, the amounts are not material, compliance would be costly if not impossible and the suggested accounting does not provide users with useful financial information.

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Terry Mulreany
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