Tweaks to leasing standard offer reprieve

The Financial Accounting Standards Board’s (FASB) recent proposal that companies wouldn’t have to apply the new leasing standard to 2017 and 2018 results represent a big breather for the many public companies racing to comply with the standard by its January 1, 2019, deadline.

According to James Barker, Deloitte’s senior consultation partner for lease accounting, the FASB decision that the standard would only apply to new leasing arrangements means that companies won’t have to apply the new rules to their 2017 and 2018 financials.

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.

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.

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. FASB decided that companies with easements wouldn’t have to apply the new accounting standard to existing arrangements.

FASB will draft a proposed Accounting Standards Update incorporating the tweaks and the board will vote on them following a comment period of 30 days.