Defining Issues | March 2018

FASB approves new transition method and lessor practical expedient for leases standard

KPMG reports on decisions made by the FASB at its March 2018 meetings. The FASB approved amendments to create an additional transition method and a lessor practical expedient for separating lease and non-lease components; and decided to propose additional amendments to address operational issues for lessors related to sales taxes and lessee payments of lessor costs.


Applying the new leases standard

  • Optional transition relief – companies within the scope of the leases standard (ASC 842)
  • Lessor separation of lease and non-lease components – lessors with contracts that contain lease and non-lease components
  • Sales and other similar taxes – lessors that enter into leases that give rise to sales and other similar taxes
  • Lessor costs paid by lessee – lessors with leases for which the lessee pays lessor costs

Relevant dates

  • Effective date will coincide with the effective date of the leases standard for companies that have not early adopted
  • For companies that have early adopted, the transition amendments will be effective on issuance of the ASU, and the lessor practical expedient will be eligible for election at either the beginning of the first financial reporting period that begins after issuance of the ASU or the original mandatory effective date of ASC 842 for the company

Key impacts

An ASU with targeted improvements will be issued, including:

  • Optional transition relief. A new, optional transition method that will give companies the option to use the effective date of ASC 842 as the date of initial application on transition. Companies that elect this transition option will not adjust their comparatives or make the new required lease disclosures for periods before the effective date
  • Lessor separation of lease and non-lease components. A practical expedient permitting lessors to make an accounting policy election by class of underlying asset to not separate non-lease components of a contract from the lease component to which they relate – when specified criteria are met.
  • Future amendments. The Board decided to undertake an additional project to amend ASC 842 that would:
    • Add a lessor practical expedient that permits lessors to present collections of sales and other similar taxes that arise from a specific lease transaction on a net basis
    • Stipulate that a lessor should present lessor costs and payments thereof made by the lessee directly to a third party on a net basis when the lessor does not know and cannot determine the amount of those costs.

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