The recently proposed tweaks to the Financial Accounting Standards Board’s new leasing rules represent a big breather for the many public companies racing to comply with the standard by its January 1, 2019, deadline, a lease accounting expert says.

James Barker

The FASB decision about the new leasing standard likely to have the most widespread effect on companies would give them a pass in applying the new rules to their 2017 and 2018 financials, according to James Barker, Deloitte’s senior consultation partner for lease accounting.

The standard would only apply to new leasing arrangements. Under the current standard, companies “would be required to recast 2017 and 2018 to reflect the effects of the new leasing standard. You’re basically restating those periods in the year of adoption,” Baker says.

But at FASB’s meeting last week, the board tentatively decided to issue an accounting standards update that would, among other changes, shed that requirement.

“That was a big deal to a lot of folks,” says Barker. Many companies complained that compliance would be “very time consuming” and that corporate accountants were concerned that their data systems might not be able to handle two years’ worth of changes fast enough, he adds.

“A lot of companies out there are very worried about being able to adopt this standard on time,” the accountant said, noting that when they input lease modifications into their systems for 2017 and 2018, “there are all kinds of things that that can happen and will happen.”

Beyond the brain power and the time required to comply with the standard, companies are concerned that currently available technology “would have a hard time doing what’s necessary for those comparative periods,” Barker adds. “Not [having] to worry about the accounting in those periods is a big relief.”

In a second move, FASB tentatively decided that lessors should get a break that lessees currently enjoy: not having to separately report non-leasing elements in a lease arrangement. For example, under the standard, a landlord would have had to separate the reporting of a building’s lease from the common-area maintenance services the landlord provided for tenants, according to Barker.

Real estate lessors complained that such “bifurcation” of reporting involved a great deal of work and wasn’t especially important to their investors, who “just want to know what the total revenue from the lease is,” he says.

In response, FASB decided that, in certain cases, lessors could meld non-lease elements with the overall revenue reporting for the lease. The board is still sorting through the issue of under what conditions the change would apply.

While the provision would apply exclusively to lessors, that doesn’t mean it would give a break solely to banks, realtors, or equipment manufacturers, according to Barker. Although companies largely assume the  role of lessees, many have lessor arrangements in their portfolios as well.

Avis is a company that heavily emphasizes its lessor role. Thus, the FASB decision involving lessors is a “big deal” for the car rental company, Cathleen DeGenova, director of Securities and Exchange Commission reporting and technical accounting at Avis Budget Group, said at this week’s American Institute for Certified Public Accountants financial reporting conference in Washington.

To be sure, FASB’s decision to not require companies to apply the standard to 2017 and 2018 “simplifies [Avis’s reporting as a lessee] a bit,” DeGenova said. However, she added, it doesn’t do much to alleviate the company’s otherwise heavy leasing compliance burdens.

FASB’s third tweak involves easements and is a “very big issue” for the narrow subset of companies that must account for these property rights in their leasing arrangements, according to Barker. A utility company, for instance, might need to acquire easements to provide it with the right to run a transmission line across a county or town.

Under such a contract, the utility might arrange with the landowner to be able to run electric lines across the property. “Those arrangements look like leases. But they are not, in many cases, identical to leases” because they provide the utility with a partial rather than an exclusive right to use the land, says Barker.

Up until now, such arrangements have represented a “gray zone” for accountants, with some accountants regarding them as leases and others as intangibles, he says, a situation which has spawned “a lot of diversity in practice.”

Last week, however, FASB tentatively held that since easements fundamentally involve the use of land, post-2019 arrangements should be analyzed using the model in the new leasing standard, according to the Deloitte accountant.

More significantly, Barker says, FASB decided that companies with easements wouldn’t have to apply the new accounting standard to existing arrangements. “That’s a big deal, he adds, because “an average utility may have 10,000 easements.”

Moving swiftly on the decisions, FASB directed its staff to draft a proposed Accounting Standards Update incorporating them. Following a comment period of 30 days, the board will vote on the ASU.