The FASB has issued ASU No. 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors. The ASU is intended to resolve various implementation questions and issues raised by lessors relative to ASU No. 2016-02, Leases (Topic 842), a pronouncement which significantly modifies the required accounting treatment for leases and which becomes effective on January 1, 2019 for public business entities, and on January 1, 2020 for all other entities.
Since the issuance of ASU No. 2016-02, lessor stakeholders have informed the FASB about certain issues that they are experiencing on the following when applying Topic 842:
Sales Taxes and Other Similar Taxes Collected from Lessees
The guidance in ASU No. 2016-02 requires lessors to analyze sales taxes and other similar taxes on a jurisdiction-by-jurisdiction basis to determine whether those taxes are the primary obligation of the lessor as owner of the underlying asset being leased or whether those taxes are collected by the lessor on behalf of third parties. When a sales (or other similar) tax is collected from a lessee on behalf of third parties (that is, the lessor is acting as an agent), a lessor excludes that amount from (lease) revenue. When the lessor is primarily obligated for payment of the tax, the lessor accounts for the payment as a lessor cost and includes that amount in (lease) revenue and costs.
Lessor stakeholders observed that evaluating whether sales taxes and other similar taxes are collected on behalf of third parties would be costly and complex because of the number of jurisdictions and the variation of, and changes in, tax laws among those jurisdictions. Those lessor stakeholders also observed that users of financial statements would be provided with limited financial reporting benefits because the net effect of recording those taxes would be zero in the income statement.
Thus, ASU No. 2018-20 allows lessors to make an accounting policy election to not evaluate whether certain sales taxes and other similar taxes are lessor costs (as described in paragraph 842-10-15-30(b)) or lessee costs. Instead, those lessors will account for those costs as if they are lessee costs. Consequently, a lessor making this election will exclude from the consideration in the contract and from variable payments not included in the consideration in the contract all collections from lessees of taxes within the scope of the election and will provide certain disclosures.
Certain Lessor Costs
ASU No. 2016-02 requires a lessor to report costs paid by lessees directly to third parties on behalf of the lessor or to the lessor as a reimbursement as revenue and expenses. Lessor stakeholders observed that reporting certain lessor costs paid by lessees directly to third parties on behalf of the lessor would be costly and complex, and, perhaps, not possible, in many situations. Lessor stakeholders also contended that recording these amounts would provide users of financial statements with limited financial reporting benefits.
ASU No. 2018-20 addresses stakeholders’ concerns about the operability challenges encountered in determining certain lessor costs paid by lessees directly to third parties by requiring lessors to exclude from variable payments, and thus from lease revenue, lessor costs paid by a lessee directly to a third party. The amendments also clarify that costs excluded from the consideration in a contract that are paid directly to a third party by a lessor and reimbursed by the lessee are lessor costs to be accounted for as variable payments. A lessor will record those reimbursed costs as revenue.
Recognition of Variable Payments for Contracts with Lease and Nonlease Components
The guidance in paragraph 842-10-15-40 requires lessors to recognize certain variable payment amounts in profit or loss in the period when the changes in facts and circumstances on which the variable payment is based occur, regardless of whether the payment partially relates to nonlease components. Some stakeholders observed that this guidance might result in a lessor recognizing revenue for a nonlease component in a period in advance of the period in which the nonlease component is satisfied under another Topic, such as Topic 606, Revenue from Contracts with Customers. Therefore, those stakeholders requested amendments (or clarification) about that paragraph’s intent.
Thus, the provisions of ASU No. 2018-20 related to recognizing variable payments for contracts with lease and nonlease components require lessors to allocate (rather than recognize as is currently required) certain variable payments to the lease and nonlease components when the changes in facts and circumstances on which the variable payment is based occur. After the allocation, the amount of variable payments allocated to the lease components will be recognized as income in profit or loss in accordance with Topic 842, while the amount of variable payments allocated to nonlease components will be recognized in accordance with other Topics, such as Topic 606.
Effective Date
The amendments in ASU No. 2018-20 affect the amendments in ASU No. 2016-02, which are not yet effective but can be early adopted. The effective date and transition requirements for the amendments in ASU No. 2018-20 for entities that have not adopted Topic 842 before the issuance of ASU No. 2018-20 are the same as the effective date and transition requirements in ASU No. 2016-02 (for example, January 1, 2019, for calendar-year-end public business entities).
For entities that have adopted Topic 842 before the issuance of ASU No. 2018-20, the transition and effective date of the amendments in ASU No. 2018-20 are as follows:
The full text of ASU No. 2018-20 is available here.
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