July 27, 2018 — FASB Votes to Expose Additional Narrow-Scope Improvements to the Lessor Accounting Model for Public Comment
FASB Votes to Expose Additional Narrow-Scope Improvements to the Lessor Accounting Model for Public Comment
Deloitte Accounting Journal | July 27, 2018
At its meeting on July 25, 2018, the FASB discussed potential disclosure requirements related to tentative decisions reached at its March 28, 2018, meeting1 regarding (1) sales (and other similar) taxes collected from a lessee and (2) certain lessor costs that are paid directly by the lessee under the new leasing standard.2 In addition, the FASB discussed requests from stakeholders to clarify the guidance on the recognition of variable payments for contracts that include both lease and nonlease components.
Connecting the Dots
On July 19, 2018, the FASB issued ASU 2018-10,3 which provides narrow-scope amendments to clarify application of certain aspects of the new leasing standard. The amendments address various minor corrections to the standard. For more information about the corrections, see Section 18.104.22.168 of Deloitte’s A Roadmap to Applying the New Leasing Standard, which discusses each item as proposed.
At its March 28, 2018, meeting, the Board reached tentative decisions related to (1) a lessor’s accounting and presentation of sales taxes and (2) the lessor’s accounting for certain lessee paid costs (e.g., property taxes and insurance) included in lease contracts under the new leasing standard (described below). Notwithstanding the FASB’s tentative decisions reached at its March 2018 meeting, the Board did not discuss the related disclosure requirements for these issues. Therefore, the purpose of the July 2018 meeting was to discuss the related disclosure requirements for the following tentative decisions:
Accounting policy election to present sales taxes (and other similar taxes) collected from a lessee on a net basis.
Exclusion of certain lessor costs (e.g., property taxes and insurance) that are paid directly by the lessee to a third party (e.g., a taxing authority or insurance provider) on behalf of the lessor.
The discussion below summarizes the tentative decisions reached at the Board’s March 28, 2018, meeting and the Board’s tentative decisions related to the associated disclosure requirements.
Accounting Policy Election for Sales (and Other Similar) Taxes
At its meeting on March 28, 2018, the Board tentatively decided to provide an accounting policy election for sales and other similar taxes outlined in ASC 842,4 consistent with ASC 606-10-32-2A. That is, the accounting policy election would permit a lessor to exclude from the measurement of lease revenue and the associated expense any taxes assessed by a governmental authority that are both (1) imposed on and concurrent with a specific lease revenue-producing transaction and (2) collected by the lessor from a lessee.
Tentative Decisions Reached on Required Disclosures
The Board tentatively decided to require a lessor that makes this accounting policy election to disclose that fact consistent with other requirements in ASC 842 to disclose practical expedients elected.
Certain Lessor Costs (e.g., Property Taxes and Insurance)
At its March 28, 2018, meeting, the Board tentatively decided that lessors should apply the same principles in paragraph BC38(c) of ASU 2016-085 about excluding amounts from the transaction price when the uncertainty in the transaction price is not expected to ultimately be resolved.
Tentative Decisions Reached on Required Disclosures
The Board tentatively decided to not include any disclosure requirements related to a lessor’s accounting for costs paid directly by the lessee to third parties. Specifically, the Board tentatively decided against the staff’s recommendation to require a lessor to disclose a description of the lessor’s cost and the nature of the uncertainty which would cause the amount to not be readily determinable by the lessor. In reaching their tentative decision, Board members believed that these disclosures would likely not be particularly useful and may become boilerplate in nature over time.
Notwithstanding its tentative decision, the Board supported including a question in the proposed ASU, which would allow stakeholders to comment as to whether and, if so, what disclosures related to lessor costs paid directly by a lessee would be useful.
Proposed Amendment to Guidance on Recognition of Variable Payments for Contracts With Lease and Nonlease Components
ASU 2016-02 includes the following guidance on how a lessor should account for variable payments in contracts that include both lease and nonlease components. ASC 842-10-15-40 states:
If the terms of a variable payment amount other than those in paragraph 842-10-15-35 relate to a lease component, even partially, the lessor shall recognize those payments as income in profit or loss in the period when the changes in facts and circumstances on which the variable payment is based occur (for example, when the lessee’s sales on which the amount of the variable payment depends occur).
On the basis of the current drafting of ASC 842-10-15-40, stakeholders questioned whether the guidance would allow a lessor/provider to recognize revenue for a nonlease component (e.g., a service) “in the period when the change in facts and circumstances on which the variable payment is based occur” even if the nonlease component (or a part of the nonlease component) had not yet been delivered to the customer.
The Board discussed this issue at its January 24, 2018, meeting regarding overall Codification improvements. During this discussion, the Board expressed its intent with respect to the application of ASC 842-10-15-40, noting that the paragraph in question is not intended to override other relevant guidance in U.S. GAAP. That is, the Board clarified that a lessor should apply the other guidance (e.g., ASC 606) related to nonlease components to account for those components. Although the Board clarified its intent at its January 24, 2018, meeting, stakeholders observed that the Board did not amend the Codification to reflect its intent. As such, stakeholders continue to question the Board’s intent and how ASC 842-10-15-40 should be applied in situations in which a variable payment relates to both a lease and nonlease component.
Tentative Decisions Reached on Amending the Guidance
At the July 25, 2018, meeting, the Board discussed whether to amend the guidance in ASC 842-10-14-40 to address stakeholder concerns related to this issue. Several Board members questioned whether an amendment to ASC 842-10-15-40 was necessary. These Board members observed that a lessor would not be required to allocate the variable payment if it elects the proposed practical expedient not to separate lease and nonlease components in a contract.6 However, other Board members noted that certain criteria will need to be met to elect the proposed practical expedient, and therefore an amendment to ASC 842-10-15-40 may be necessary.
One Board member suggested an alternative, which would incorporate the concept of predominance into ASC 842-10-15-40, such that the entire variable payment would be accounted for consistent with ASC 842 or ASC 606 depending on whether the lease or nonlease component is the predominant component in the contract. However, the FASB staff was concerned that amending the guidance in this manner could result in a more pervasive change to the fundamental lessor model.
Ultimately, the Board tentatively decided to amend ASC 842-10-15-40 to clarify that a lessor should allocate variable payments between lease and nonlease components and recognize the allocated amounts in accordance with the relevant guidance (i.e., ASC 842 for the lease component and other guidance — for example, ASC 606 — for the nonlease component).
In addition, the Board discussed the questions it plans to include in the proposed ASU related to the proposed amendment to ASC 842-10-15-40. Specifically, the Board supported including questions about (1) which transactions would be affected by the amendment in ASC 842-10-15-40 in the event the practical expedient on lessor separation of lease and nonlease components is elected (i.e., which transactions would not fall within the scope of the separation practical expedient), (2) the cost to comply with the proposed amendment, (3) a more cost-effective amendment (e.g., using the notion of predominance), and (4) the recognition impact of the alternative approach identified in (3).
Next Steps Related to These Tentative Decisions
The Board plans to issue a proposed ASU to reflect the Board’s tentative decisions reached at this week's meeting. The Board tentatively agreed to a 30-day comment letter period and tentatively decided to align the effective date and transition related to these issues with the effective date and transition of the new leasing standard.
Connecting the Dots
At its July 25, 2018, meeting, the FASB also deliberated potential Codification improvements to the amendments in ASU 2016-13,7 including clarifying the accounting for the impairment of operating lease receivables. The Board tentatively decided to clarify that operating lease receivables are not within the scope of ASC 326 and will expose this decision for public comment. For more information on the Board’s proposed amendments to the current expected credit losses standard, see Deloitte’s July 27, 2018, journal entry.
During the July 25, 2018, meeting, a FASB staff member noted that the FASB plans to issue a final ASU related to the proposed practical expedient for a lessor to elect not to separate lease and nonlease components in the next two weeks. The final ASU will also reflect the amendments related to the additional transition option which allows an entity to elect to not restate its comparative periods in the period of adoption when transitioning to ASC 842.