FASB Simplifies the Accounting for Property Taxes and Insurance in New Leases Standard
On Oct. 31, the Financial Accounting Standards Board (FASB) held a meeting to discuss comments received from stakeholders on the proposed Accounting Standards Update, Leases (Topic 842): Narrow-Scope Improvements for Lessors (the proposed ASU). Of interest to equity REITs was the decision reached on the accounting treatment for lessor costs (e.g., property taxes and insurance). The FASB decided that if lessees pay these costs directly to a third party on behalf of the lessor, the lessor would not recognize these lessee payments in its financial statements. Conversely, the FASB decided that lessor costs include those that are not part of the consideration in the lease contract that are paid by a lessor directly to a third party and are reimbursed by a lessee. Thus, the lessor should recognize these costs and the corresponding reimbursements in its financial statements. These decisions address the concerns raised in a comment letter written by a coalition of Nareit members operating as triple-net lessors.
The FASB plans to issue a final standard in the near term. The FASB indicated that the proposed ASU (when finalized) will have the same effective date as the New Leases Standard, which is for annual periods beginning after Dec. 15, 2018.