On August 13, 2018, the Financial Accounting Standards Board (FASB) issued proposed Accounting Standards Update 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors, for public comment. This update narrows the scope of what Lessors need to report for leases.
Background
Issues around accounting for the requirements of Topic 842 have been reported to the FASB after the implementation of the new lease accounting guidance in Update 2016-02. The original intent of the rule was to provide more transparency and useful information to the users of the financial statements about leases. Items like sales tax, insurance, and maintenance were included in both revenue and related expenses of leases. There were issues reported to the Board about the operational complexity of tracking and accounting for these costs that the Board addressed with this update.
Changes
Sales Taxes: Lessors are permitted to make an election to exclude sales tax from the lease contract and related expenses and account for them as Lessee costs.
Example: A car dealership will not need to report sales tax as part of lease revenue or related lease expense.Certain Lessor Costs: Variable costs like insurance paid directly by the Lessee will be excluded by the Lessor in accounting for the lease. These costs won’t be reported as lease revenue and related expense.
Example: Insurance on a property paid by the Lessee is not a part of the lease contract. The contract is for the right to use the building. These costs won’t be reported as lease revenue and related expense.Variable Payments for Contracts with Lease and Non-Lease Components: Lessors are required to allocate variable payments to the lease and non-lease components of the contract on a relative basis of the total amount of the contract.
Example: An equipment lease for $100,000/year for 3 years and has a maintenance component. The contract is accounted for based on the relative fair market value of each standalone part of the contract. Lease revenue and expense are recognized based on this allocation.
| Stand Alone Price | Relative Allocation Contract | |
| Lease | 285,000 | 86% |
| Maintenance | 45,000 | 14% |
| Total | 330,000 | 100% |
| Contract Amount | 300,000 |
When does ASU 2018-20 become testable on the CPA Exam?
ASU 2018-20 is eligible for testing Q3 2019.