The Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU) 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842, that clarifies the application of the new leases guidance to land easements. Lease amendments (ASU 2016-02 and 2018-01) are effective for public entities with annual periods beginning after December 15, 2018, and will be testable on the CPA Exam on Jan. 1, 2019.
Land easements (also called rights of way) represent the right to use, access, or cross another entity’s land for a specified purpose. Land easements are often used by utility and telecommunications companies, for example, when they need to take a small strip of land—or easement—to bury wires.
The FASB has received feedback from stakeholders that the requirement to evaluate all old and existing land easements (sometimes numbering in the tens of thousands) to determine if they meet the definition of a lease under the new standard could be very costly. Additionally, entities stated that there would be minimal benefit in performing such an evaluation as many of their land easements would not meet the definition of a lease, and that many of the existing easements are prepaid and already recognized on the balance sheet.
As a result of the feedback, an optional transition practical expedient is provided in ASU 2018-01 which, if elected, would not require an entity to reassess the accounting treatment of existing land easements not currently accounted for under the old lease guidance. Any new or modified land easements are to be evaluated under the new lease guidance once adopted by the entity.
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