The FASB clarifies the application of the new leasing standard to land easements

Background

On 25 February 2016, the FASB issued Accounting Standards Update No. 201602, Leases (Topic 842), to increase transparency and comparability among organisations by recognising lease assets and lease liabilities on the balance sheet and disclosing key information about leasing transactions.

In connection with the FASB’s transition support efforts, a number of stakeholders inquired about the application of the new lease requirements in Topic 842 to land easements.

Land easements (also commonly referred to as rights of way) represent the right to use, access, or cross another entity’s land for a specified purpose. Land easements are used by utility and telecommunications companies, for example, when they need to take a small strip of land—or easement—to bury wires. Not all companies have historically accounted for them as leases.

Stakeholders pointed out that the requirement to evaluate all old and existing land easements—sometimes numbering in the tens of thousands—to determine if they meet the definition of a lease under the new standard could be very costly. They also noted there would be limited benefit to applying this requirement, as many of their land easements would not meet the definition of a lease—or, even if they met that definition, many of their easements are prepaid and, therefore, already are recognised on the balance sheet.

Scope of the ASU

The amendments in this ASU affect entities with land easements that exist or expired before an entity’s adoption of Topic 842, provided that the entity does not account for those land easements as leases under Topic 840.

Main provisions of the ASU

• The amendments in this ASU permit an entity to elect an optional transition practical expedient not to evaluate under Topic 842 land easements that exist or expired before the entity’s adoption of Topic 842 and that were not previously accounted for as leases under Topic 840. An entity that elects this practical expedient should apply the practical expedient consistently to all of its existing or expired land easements that were not previously accounted for as leases under Topic 840.
• Once an entity adopts Topic 842, it should apply that Topic prospectively to all new (or modified) land easements to determine whether the arrangement should be accounted for as a lease.
• An entity that does not elect this practical expedient should evaluate all existing or expired land easements in connection with the adoption of the new lease requirements in Topic 842 to assess whether they meet the definition of a lease. An entity should continue to apply its current accounting policy for accounting for land easements that existed before the entity’s adoption of Topic 842. For example, if an entity currently accounts for certain land easements as leases under Topic 840, it should continue to account for those land easements as leases before its adoption of Topic 842.
• This ASU also amends Example 10 of Subtopic 350-30, Intangibles—Goodwill and Other—General Intangibles Other Than Goodwill.

Effective dates

The amendments in this ASU affect the amendments in Update 2016-02, which are not yet effective but may be early adopted, and Example 10 of Subtopic 35030. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in Update 2016-02. An entity that early adopted Topic 842 should apply the amendments in this Update upon issuance.

The new ASU is available here.

Sources:
www.iasplus.com
www.FASB.org