The FASB Issues Transition Practical Expedient and Clarifies Application of ASC Topic 842 to Land Easements

On January 25, 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-01, Land Easement Practical Expedient for Transition to Topic 842, which updates the FASB’s Accounting Standards Codification® (ASC) Topic 842, Leases. The update provides entities an option to not evaluate existing or expired easements not previously accounted for as a lease upon adoption of ASC Topic 842.

Key Provisions

Land easements are the right to use, access, or cross another entity’s land for a specified purpose. Under current transition guidance in Topic 842, entities would need to evaluate all existing or expired land easements in determining whether or not they meet the definition of a lease. Generally, it was felt that this process would be costly and complex because of the volume and age of land easements.

By electing this practical expedient, entities don’t need to evaluate existing or expired land easements that weren’t previously accounted for as leases under current lease guidance and will continue to apply its existing accounting policy.

However, entities will still be required to evaluate any new or modified land easements after adoption of Topic 842. If an entity doesn’t elect this practical expedient, it must assess all existing or expired land easements to determine whether or not the easements meet the definition of a lease upon adoption of Topic 842.

ASU 2018-01 also clarifies that:

  • An entity should evaluate whether land easements are leases under Topic 842 before applying the guidance in Example 10 of ASC Topic 350, Intangible Assets.
  • Perpetual easements aren’t leases because they don’t convey the right to use the underlying land for a specified period of time.

Transition and Effective Date

The changes are to be applied using the same effective dates currently required under Topic 842. This means they’re effective for fiscal years beginning after December 15, 2018, including interim periods within those financial years for any of the following:

  • Public business entities
  • Not-for-profit entities that have issued, or are a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market
  • Employee benefit plans that file financial statements with the US Securities and Exchange Commission

All other entities will be required to adopt the new lease standard in fiscal years beginning after December 15, 2019, and interim periods in fiscal years beginning after December 15, 2020. Early adoption is permitted for all entities.

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