The simplification is designed to reduce the cost of implementing the new leases standard for companies reporting under US GAAP.

‘The new ASU reduces the cost of adopting the new leases standard for certain land easements,’ said FASB chairman Russell G Golden. ‘Additionally, it helps ensure that companies can make a successful transition to the standard without compromising the quality of information provided to investors about these transactions.’

Land easements (also commonly referred to as rights of way) represent the right to use, access, or cross another entity’s land for a specified purpose. They are used by utility and telecommunications companies, for example, when they need to take a small strip of land or easement to bury wires. Not all companies have historically accounted for them as leases.

Stakeholders pointed out that the requirement to evaluate all old and existing land easements, sometimes numbering in the tens of thousands, to determine if they meet the definition of a lease under the new standard could be very costly.

They also noted there would be limited benefit to applying this requirement, as many of their land easements would not meet the definition of a lease or, even if they met that definition, many of their easements are prepaid and, therefore, are already recognised on the balance sheet.

The land easements ASU addresses this by:

• providing an optional transition practical expedient that, if elected, would not require an organisation to reconsider their accounting for existing land easements that are not currently accounted for under the old leases standard; and
• clarifying that new or modified land easements should be evaluated under the new leases standard, once an entity has adopted the new standard. 

The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in Update 2016-02. They can be early adopted if required.

The ASU on leases will take effect for public companies reporting under US GAAP for fiscal years, and interim periods within those fiscal years, beginning after 15 December 2018. For all other organisations, it will take effect for fiscal years beginning after 15 December 2019, and for interim periods within fiscal years beginning after 15 December 2020.

Outside US GAAP reach, most listed reporters will have to implement IFRS 16 Leases, effective 1 January 2019.

Update No. 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842 is available here

Report by Sara White