Land Easements under ASC 842 and Practical Expedients

In January of 2018, the FASB amended its leases standard to be a more encompassing standard for all leases and replace the variability in the way that entities were accounting for leases with a uniform method. Before the newly adopted standard was proposed, there was no consistent practice for how leases should be accounted for, and as a result, entities relied on a variety of guidance, such as: ASC 350, ASC 360, ASC 840. The proposition of ASC 842 by the FASB was intended to do away with the variety of standards in use to account for leases and replace them with one invariable standard that could be used as guidance in nearly all instances. However, in the case of accounting for perpetual leases, the guidance of ASC 350 will remain necessary.

The new standard, ASC 842, was originally slated to go into effect after December 15, 2018 for public companies, and after December 15, 2019 for non-public companies. However, the FASB decided to push the release of this standard back for non-public companies by one more year, making the new date of implementation for this group after December 15, 2020. Along with the implementation of the amendment, the FASB gave entities the option to elect transition practical expedients that would essentially allow them to retain their old method of accounting for land easements and other right-of-use assets, providing the leases met certain practical expedient requirements. Furthermore, once the adoption date has passed for entities in either category, all leases and land easements must be accounted for using ASC 842. The purpose behind the practical expedient was expressly designed to reduce cost and complexity of standard implementation for entities, specifically those with older land easement arrangements or numerous land easement arrangements for which a transition to a new standard of accounting may prove to be uniquely challenging.

Thus, in order to mitigate a portion of implementation issues, the FASB held that land easements and right-of-use assets that have previously been accounted for under other standards will not need to be accounted for under ASC 842 as long as some criteria are satisfied. The standard requires that land easements had to be existing or expiring before the date of adoption, and could not have previously been accounted for by an entity using the FASB ASC 840. It also holds that if a right-of-use easement is ongoing on a perpetual basis then it also does not qualify for the practical expediency implementation, because there is no time-period constraint for which access to the asset is limited. If any of those criteria could not be met, then the entity would need to implement ASC 842 for its land easement leases.

Stated differently, if an entity holds land easements or other right-of-use assets before the date of adoption for FASB ASC 842 and they were not previously being accounted for using FASB ASC 840 or ongoing perpetually, then the entity is given the option of accounting for those land easements as they always have. For entities that elect the practical expedient, there will be no need to reassess their land easements under the newer standard.

Additionally, although the FASB does not require entities to elect the practical expedient, it also does not allow for inconsistent application of the practical expedient. Were an entity to adopt the practical expedient for leases of right-of-use assets that existed or were expiring before the date of adoption, then the entity must adopt the same method for all similar leases that the entity possesses. If an entity holds a portfolio of land easements that exist or expire before adoption and wishes to apply the practical expedient, then the entity must elect the practical expedient for each land easement as a whole. Individual land easement elections would be prohibited, which would prevent similar land easements from being accounted for under two different standards.

Furthermore, the FASB allows for any entity to early- adopt the amendment, regardless of entity type. However, once an entity early- adopts the amendment, it becomes effective immediately. Upon adoption, all land easements that satisfy the aforementioned requirements may continue to be accounted for as the entity normally has done; however, all subsequent land easements would be recognized under ASC 842, regardless of the standard's stated adoption date, since the effective adoption for that entity was elected before it was required to be.