FASB Proposes Relief for Lessors with Triple-Net Leases
On Aug. 13, the Financial Accounting Standards Board (FASB) issued a proposal that would make narrow scope improvements for lessors in the new leases standard. Nareit members operating as equity REITs that have triple-net leases will be particularly interested in the proposed improvements relating to the accounting treatment of certain lessor costs paid directly by lessees to third parties on behalf of the lessor (e.g., insurance). If you are interested in participating in a Nareit task force that will evaluate the proposal and consider whether Nareit should comment, please contact Christopher Drula ( firstname.lastname@example.org) by Aug. 21. Comment letters are due to the FASB by Sept. 12.
Sales Taxes and Other Similar Taxes Collected from Lessees
The proposal would permit lessors, as an accounting policy election, to not evaluate whether certain sales taxes and other similar taxes are costs of the lessor or costs of the lessee. Instead, lessors would account for those amounts as if they were costs of the lessee. Consequently, a lessor making this election would 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 would provide certain disclosures.
Certain Lessor Costs Paid Directly by Lessees
The proposal would require lessors to exclude from variable payments lessor costs paid by a lessee directly to a third party when the amount of lessor costs paid by the lessee is not readily determinable by the lessor.
Recognition of Variable Payments for Contracts with Lease and Non-lease Components
The proposal would require lessors to allocate (rather than recognize as currently required) certain variable payments to the lease and non-lease 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 component would be recognized as income in profit or loss in accordance with Topic 842, while the amount of variable payments allocated to non-lease components would be recognized in accordance with other topics (e.g., Topic 606).
The proposal would amend the new leases standard, which is not yet effective but can be early adopted. The effective date and transition requirements in the proposal for companies that have not yet adopted the new leases standard by the time that the proposal is finalized would be the same as the effective date and transition requirements of the new leases standard. The FASB will determine the effective date and transition of the proposal for companies that have already adopted the new leases standard before the issuance of this proposal after it considers stakeholders’ feedback on the proposal.