The Financial Accounting Standards Board (FASB) has released proposed guidance aimed primarily at lessors, intended to make implementing the new lease standard easier and less expensive. The proposal seeks to address issues that stakeholders have experienced as they attempt to apply the new standard. 

One proposed amendment has to do with sales and other taxes collected by lessors from lessees. The current standards require that lessors analyze such taxes on a jurisdiction-by-jurisdiction basis to determine whether they are the primary responsibility of the lessor as owner of the underlying leased asset, in which case the taxes are included in revenue and costs, or whether they are being collected by the lessor on behalf of a third party, in which case they are not. Stakeholders noted, however, that making this calculation on a jurisdiction-by-jurisdiction basis is time consuming and costly, and since the net effect of recording these taxes would be zero, they thought the financial information was less useful. 

Consequently, the FASB is proposing that lessors, as an accounting policy election, may choose not to evaluate whether the costs belong to the lessor or lessee; instead, lessors would just account for these amounts as if they were costs to the lessee, and then exclude from the consideration in the contract, and from variable payments not included, all collections from the lessee of taxes within the scope of the election, so long as the lessor provides certain disclosures relating to the decision. 

Beyond taxes, another area the proposal seeks to address is costs incurred by the lessor, as owner of the asset, which are paid for by the lessee. Under the current standard, these payments do not count as having transferred a good or service separate from the right to use the underlying asset, instead requiring that they be reported as revenue and expenses. But stakeholders said that this kind of reporting would be costly and complex and, in some situations, impossible. Determining the amounts of revenue could be affected by numerous factors, not all of which the lessor would know about. Also, they said the disclosures would be of little use to readers. 

Because of this difficulty, the FASB has proposed that lessor costs paid directly by lessees to third parties on behalf of the lessor would be excluded when considering variable payments, and therefore be excluded from variable revenue, when the amount of those costs is not readily determinable by the lessor. 

Finally, the current guidance requires that lessors 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 occurs, regardless of whether the payment is partially related to nonlease components. Yet stakeholders, said that this requirement could result in a revenue recognition error for nonlease components in a period that's in advance of when the component is transferred to the customer using other guidance, such as the revenue recognition standard. 

In response, the FASB is proposing that lessors "allocate" rather than "recognize" certain variable payments to the lease and nonlease components when there are changes in facts and circumstances on which the variable payment is based. After the allocation, the amount of variable payments allocated to the lease component is then recognized as income in profit or loss in accordance with the current lease guidance, while the amount of variable payments allocated to nonlease components would be recognized in accordance with other topics, like Topic 606. 

“Through our implementation process on the Leases standard, stakeholders informed us that lessors face certain issues in accounting for sales and other similar taxes, certain lessor costs, and certain requirements related to variable payments in contracts,” said Russell G. Golden, FASB chairman. “This proposed accounting standard provides financial statement preparers relief and clarity in these areas and should help them implement the Leases standard.”

Stakeholders are encouraged to review and provide comment on the proposal by Sept. 12, 2018.

The proposal comes shortly after the release of other updated guidance on the lease standard meant to ease implementation. It clarified confusion on the effective date of the standard, and provided a practical expedient on separating out lease and nonlease components.