On Sept. 25, the Financial Accounting Standards Board (FASB or Board) issued a Proposal (the Proposal) that would require an evaluation of whether a land easement meets the definition of a lease under the new Leases standard. The Proposal includes transition relief for land easements in existence prior to the effective date of the new Leases standard (i.e., annual periods beginning after Dec. 15, 2018 for calendar year-end companies). If you are interested in joining a NAREIT Task Force that will evaluate the Proposal and consider whether NAREIT should develop a comment letter, please contact Christopher Drula by Oct. 11. Comments are due to the Board by Oct. 25.
Land easements (e.g., rights of way) represent the right to use, access, or cross another entity’s land for a specified purpose. There currently is diversity in practice in accounting for land easements. For example, while some entities apply Topic 840, Leases, for the accounting of their land easements, other entities apply other guidance, such as Topic 350, Intangibles–Goodwill and Other, or Topic 360, Property, Plant, and Equipment.
The Proposal would clarify that land easements are required to be assessed under the new Leases standard to determine whether the arrangements are or contain a lease. Additionally, the Proposal would permit an entity to elect a transition practical expedient to not apply the new Leases standard to land easements that exist or expired before the effective date of the new Leases standard and that were not previously assessed under current Leases guidance. Companies that elect to apply the practical expedient would be required to apply the practical expedient consistently to all existing or expired land easements that were not previously assessed under current Leases guidance. Companies would continue to apply its current accounting policy in accordance with Topic 840 for accounting for land easements that existed before the effective date of the new Leases standard. Once a company adopts the new Leases standard, it would apply that guidance prospectively to all new (or modified) land easements to determine whether the arrangement should be accounted for as a lease.
The Proposal (if approved) would have the same effective date as the new Leases standard.