In response to the major challenges reported associated with lease accounting compliance, FASB amended the new leases standard to provide a practical expedient. The concerns reported by stakeholders were about the difficulty of defining standalone selling prices for lease and non-lease components that aren’t sold separately, and the significance of data regarding the separate components to users of the financial statements.
Initially, the new leases standard required lessors to separate a contract’s lease components from non-lease components (such as maintenance). The new option available for lessors through the practical expedient is to not separate non-lease components from the associated lease components when the following criteria are met.
- The lease component and the associated non-lease components have the same timing and pattern of transfer
- The lease component, if accounted for separately, would be classified as an operating lease
While this may provide relief, determining whether the lease component would be classified as an operating lease will require judgement, along with identifying the predominant component. The practical expedient also requires lessors to account for the combined component in accordance with the new revenue standard if the associated non-lease components are the predominant components. While the amendments have the same effective date as the new lease guidance, lessors who adapted the guidance early can apply the expedient before the effective date.
Electing this practical expedient is a commitment. Any lessor that chooses the practical expedient will be required to apply it consistently to all eligible non-lease components. In other words, a lessor cannot selectively apply this classification method.
For private business, the new lease accounting standard is effective for annual periods beginning after December 15, 2019 (January 1 2020 for calendar-year entities) and interim periods the following year. Whether a business opts in or out of the practical expedient available for lease accounting compliance, choosing a proven lease accounting and lease management software from CoStar allows you to manage leases in the manner that best suits company practices and process.