FASB Hopes to Ease Up on Lease Accounting Requirements
The Financial Accounting Standards Board (FASB) recently proposed changes to its new lease accounting standard in an accounting standards update (ASU). The proposal is in response to complaints about the complexity and cost of applying the new standard. In summary, the proposal would:
- Allow users to apply the new rules at the adoption date versus the date of the earliest period presented in a set of financial statements, and
- Under certain circumstances, remove the requirement that lessors break out costs for nonlease components from lease components.
There has been a lot of push-back from companies and nonprofits about the difficulties in applying FASB’s new leasing standard No. 2016-2, Leases (Topic 842). Many organizations are already being slammed by the complex revenue recognition standard which takes effect before the new leasing standard. The leasing standard requires detailed analysis of each significant lease to break out capitalized costs, lease obligations, and other costs. Factors that are complicating the process include:
- Non-standard contracts: most lessees use the forms generated by lessors to document their leasing arrangements. Deciphering the necessary information from each contract may be difficult.
- Complicating this is the fact that leases for many organizations are maintained at decentralized locations.
- For lessors, breaking out costs for nonlease components (ex: maintenance, taxes and insurance) can be subjective. Many leases do not segregate these costs.
- Many organizations are a ways away from implementing the special-purpose software necessary to properly account for leasing transactions under the new standard.
FASB’s first proposal would simplify the requirement to book the effects of the new accounting method in each period presented in financial statements. For example: public companies are required to adapt the standard by January 1, 2019 (for private companies and others it is 2020). A public company would include 2017 and 2018 financial statements in its 2019 annual report. The effects of the standard would need to be presented in each of these periods- a difficult and expensive process. The proposal would allow entities to give effect to the new standard at the adoption date, with changes to prior periods summarized in a “cumulative effect” adjustment to opening retained earnings.
FASB Chairman, Russell G. Golden stated, “The proposed ASU is aimed at reducing unnecessary costs around the implementation of the Leases standard without compromising the ultimate quality of information provided to investors.” The comment period on FASB’s proposal ends February 5, 2018.