Targeted Improvements For Leases


On July 30, 2018, FASB issued ASU 2018-11—Leases (Topic 842): Targeted Improvements.  This update provides lessors with an option to not separate nonlease components (e.g., maintenance obligations) from associated lease components for reporting purposes, in certain circumstances.  


The general rule is that lease and nonlease components should be accounted for separately; that is, lease components under the lease rules and nonlease components under other applicable revenue recognition rules. Lessees, however, were provided with a practical expedient to account for lease and nonlease components together to simplify the accounting, while lessors were stuck with the general rule. 


Now, lessors also have the option of electing a practical expedient to not separate the lease and nonlease components in a contract if both of the following tests are met:

  1. The timing and pattern of revenue for both components are the same.
  2. The combined single lease component is classified as an operating lease.


A lessor charges common area maintenance (CAM) fees as part of an operating lease.  The rent on the space is $5,000/month and the CAM fee is $500/month.  The lessor can elect to report a total of $5,500 in lease revenue per month since both tests for the practical expedient have been met.  

When does ASU 2018-11 become testable on the CPA Exam?

ASU 2018-11 is eligible for testing Q2 2019. 

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