United States

FASB issues narrow-scope amendments to ASC 842


The Financial Accounting Standards Board (FASB) recently issued Accounting Standards Update (ASU) 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors, to address the following issues lessors sometimes encounter in applying Topic 842 of the FASB’s Accounting Standards Codification (ASC), “Leases”:

  • Accounting for sales taxes and other similar taxes collected from lessees – ASU 2018-20 provides an accounting policy election whereby lessors may account for certain sales taxes and other similar taxes as if they are lessee costs, and exclude the costs from being reported as lease revenue with an associated expense.
  • Certain lessor costs paid directly by lessees – The ASU requires lessors to exclude from variable payments, and thus from variable lease revenue, lessor costs paid by a lessee directly to a third party. The ASU also requires lessors to account for costs excluded from the consideration of a contract that are paid by the lessor and reimbursed by the lessee as variable payments. A lessor should record those reimbursed costs as revenue.
  • Recognition of variable payments for contracts with lease and nonlease components – ASU 2018-20 requires lessors to allocate (rather than recognize as currently required in ASU 2016-02, Leases) certain variable payments to the lease and nonlease components when the changes in facts and circumstances on which the variable payment is based occur. The amount allocated to the lease component should be recognized as income in accordance with Topic 842, while the amount allocated to nonlease components should be recognized in accordance with other ASC Topics.

For an entity that has not adopted ASC 842, the effective date for ASU 2018-20 is the same as the effective date for ASU 2016-02. An entity that early adopted ASU 2016-02 should apply ASU 2018-20 at the original effective date of ASC 842 for the entity. Alternatively, the entity has the option to apply ASU 2018-20 in either the first reporting period ending after December 10, 2018 or in the first reporting period beginning after December 10, 2018.