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FASB addresses lease accounting transition questions

Tammy Whitehouse | May 12, 2017

Facing questions about how companies are expected to transition to the new lease accounting requirements beginning in 2019, the Financial Accounting Standards Board explained during a recent open meeting what it had in mind when it issued its now-codified guidance.

The new lease accounting standard requires all companies to reflect on the face of the balance sheet and through the income statement virtually all leased assets and their associated liabilities, beginning with public companies in 2019. The standard does not allow companies to follow a full retrospective method of adoption, which would mean recasting all prior periods in financial statements as if the standard had always been in place.

Instead, companies are required to follow a modified retrospective transition method with some optional practical expedients provided in the standard. Companies can apply a package of practical expedients, without cherry picking some and bypassing others, and they can apply an additional practical expedient about hindsight, according to the standard.

FASB said it has no plans to make any changes to the standard as a result of the latest questions, but instead is refreshing companies’ memories on why it settled on the transition method it did to help explain.  For starters, FASB was looking for a way to make the adoption a little less onerous from a cost standpoint.

FASB points out the transition provisions enable companies to leverage existing systems and processes related to current lease accounting requirements until the effective date of the new requirements for leases that have not expired before the adoption date. “The board did not believe that the benefits of a full retrospective transition justified the cost and complexity to preparers,” FASB wrote on its summary of the recent discussion.

The alternative would have meant keeping two sets of books and records under both old and new accounting rules, FASB points out. As written, the transition provisions also allow entities for the most part to “run off” existing leases for the remainder of the lease term, even in periods after the effective date.

In addition to trying to be sensitive to cost and complexity issues, FASB also wanted to create a transition method that would be as comparable as possible across all companies. That meant limiting optionality around the various combinations of transition approaches that companies might elect, including prohibiting full retrospective adoption.

FASB also addressed questions around how to treat pipeline laterals and easements under the new guidance. The board says it regards pipeline laterals as identified assets, so companies must evaluate whether they have a lease based on whether they have right to substantially all the economic benefits and the right to direct use of the asset. With respect to easements currently accounted for as intangible assets, the board asked its staff to perform additional research.