The new leases standard made easier for lessors

In brief , PwC US Mar 29, 2018

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On March 28, the FASB took steps to mitigate some of the challenges for lessors adopting the new leases standards. We explain.

What happened?

On March 28, the FASB tentatively approved a new practical expedient for lessors adopting the new leases standard. When issued, lessors will have the option to aggregate nonlease components with the related lease component upon adoption of the new standard if the following conditions are met:

  1. The timing and pattern of transfer for the nonlease component and the related lease component are the same.
  2. The stand-alone lease component would be classified as an operating lease if accounted for separately.

If this practical expedient is elected, the lessor would account for the combined component based on its predominant characteristic. A lessor would account for the combined component under the new revenue standard if the nonlease component is the predominant characteristic of the combined component; otherwise, it would account for it as an operating lease under the new leases standard. If elected, the practical expedient will need to be applied consistently to similar classes of underlying assets.

The FASB also discussed the presentation of certain lessor costs in response to feedback the Board has received about the operational challenges with respect to their presentation. Currently, a lessor typically presents revenue net of sales tax and also generally excludes from revenue variable property taxes and insurance costs that are paid directly by a lessee. ASC 842, as written, would require lessors to quantify these lessor costs and report them as both revenue and expense in the income statement. The Board tentatively agreed to allow lessors to make accounting policy elections to (1) exclude sales tax collected from the lessee from the transaction price and/or (2) exclude property taxes and insurance costs from variable consideration when those costs are paid directly by the lessee and the uncertainty in the amount paid is not expected to be ultimately resolved.

Why is this important?

The new practical expedient would make the application of the new leases standard easier and more cost effective for many lessors. For example, lessors with eligible operating real estate leases that also provide maintenance services can elect to not separate the real estate lease component and the nonlease maintenance services component, which would otherwise need to be separated based on their standalone selling prices. Lessors will need to apply judgment to determine the predominant characteristic of the combined component.

The ability to not gross up the income statement for the revenue and corresponding expense for certain lessor costs paid directly by the lessee will also help lessors in applying the new leases standard. For example, an equipment lessor may require the lessee to insure the leased equipment. Lessees often insure leased and nonleased equipment and other liabilities under a comprehensive umbrella insurance policy and pay a single premium under such a policy. Lessors often do not know the premium and deductibles applicable to the leased equipment. Under the new guidance, they will not have to spend time and effort to collect this data from lessees or estimate the amount applicable to the leased equipment. The presentation netted against revenue will be the same as how such costs are presented today.

What's next?

The FASB has instructed the staff to finalize the Accounting Standards Update (ASU) for the targeted improvements related to the new lessor practical expedient for components. The proposed improvements to the presentation of certain lessor costs will be exposed for public comment.

Please join PwC's 90-minute webcast on Wednesday, April 4, 2018 at 1 pm eastern to hear lessons learned and suggestions for the way forward from two finance executives of companies well on their way with their implementation projects.

Also save the date for a 90-minute leasing webcast on June 27, 2018 at 1 pm eastern when experts from PwC’s National Office will provide updates on the latest leases standard developments and their impact.

To have a deeper discussion contact:

Scott Tornberg

Partner, National Professional Services Group, PwC US

Email

Ashima Jain

Managing Director, National Professional Services Group, PwC US

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David Schmid
IFRS & US Standard Setting Leader, National Professional Services Group, PwC US
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