United States

Clarifications to land easements application guidance


Land easements (also commonly referred to as 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 some entities apply Topic 840, “Leases,” of the Financial Accounting Standards Board (FASB) Accounting Standards Codification, while other entities apply other guidance such as Topic 350, “Intangibles–Goodwill and Other,” or Topic 360, “Property, Plant, and Equipment.”

Since issuing Accounting Standards Update (ASU) 2016-02, Leases (Topic 842), the FASB has heard concerns about the cost and complexity of applying the new guidance to land easements. To address those concerns and the diversity in practice, the FASB recently issued ASU 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842, which clarifies that land easements should be evaluated under the new guidance in Topic 842 to determine whether the arrangements are or contain a lease. However, the ASU also permits an entity to elect an optional transition practical expedient to not apply Topic 842 to land easements that exist or expired before the effective date of Topic 842 and that were not previously assessed under Topic 840.

An entity electing to apply the practical expedient should do so consistently for all of its existing or expired land easements that were not previously accounted for as leases under Topic 840. An entity electing this optional transition practical expedient should continue to apply its current accounting policy for accounting for land easements that existed before the effective date of Topic 842. Once an entity adopts Topic 842, it should apply that Topic prospectively to all new (or modified) land easements to determine whether the arrangement should be accounted for as a lease.

Both ASU 2018-01 and ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, for (a) a public business entity, (b) a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market and (c) an employee benefit plan that files financial statements with the SEC. For all other entities, the ASUs are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. An entity that early adopted Topic 842 should apply the amendments in ASU 2018-01 upon issuance.

Even though the FASB provided a deferred mandatory effective date, lessees and lessors should familiarize themselves with the new lease guidance now so as to better understand its financial reporting consequences. RSM resources to assist entities in applying Topic 842 include: