How Lease Accounting Practical Expedients came to be
FASB amended the new leases standard to provide lease accounting practical expedients in response to the major challenges reported associated with lease accounting compliance. The concerns reported by stakeholders were about two main issues. Firstly, there can be difficulty when defining standalone selling prices for lease and non-lease components that are not sold separately. Secondly, the significance of data regarding the separate components to users of the financial statements.
Options Available to Lessors
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.
Required Criteria for this new option:
- 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. This would be in addition to 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 is required to apply it consistently to all eligible non-lease components. In other words, a lessor cannot selectively apply this classification method.
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. Reach out today for a demo and pricing from the team at CoStar Real Estate Manager.