FASB Issues Accounting Standards Update that Simplifies Accounting for Property Taxes and Insurance in New Leases Standard
On Dec. 12, the Financial Accounting Standards Board (FASB) issued a final accounting standards update (ASU) to the new leases standard. Of interest to equity REITs is the simplification provided for the accounting treatment of certain lessor costs (e.g., property taxes and insurance). The ASU requires lessors to exclude from variable payments, and therefore revenue, lessor costs paid by lessees directly to third parties. The ASU also requires lessors to account for costs excluded from the consideration of a contract that are paid by the lessor and reimbursed by the lessee as variable payments. Thus, a lessor will record those reimbursed costs as revenue.
The ASU addresses the concerns raised by Nareit members operating as triple-net lessors. Nareit worked with a coalition of these companies in responding to the FASB’s proposal.
The ASU will have the same effective date as the new leases standard, which is for annual periods beginning after Dec. 15, 2018.