Building lease accounting standard headed for a rewrite: FASB to amend Topic 842

Good news: The feds are liable to scale back an accounting standard for commercial building leases that some business owners say may put them at a financial disadvantage with their competitors.

The Financial Accounting Standards Board (FASB) may revise requirements under the 10-month-old Topic (or Accounting Standard Code) 842. Topic 842 mandates that business owners report legally enforceable terms and conditions of operating leases (one year or longer) under common control (“related parties”) on their balance sheets.

The previous standard, Topic 840, didn’t include the related-party requirement. Under Topic 840, businesses must report on the financial terms of leases, but not the legal terms of deals.

Some businesses complained to FASB that the new requirement didn’t make sense because many building leases are month-to-month, and often don’t involve a written contract since they’re arranged with other companies they do business with on a day-to-day basis.

Feds seem open to improving the law

Topic 842 also elicited the normal grumbling about the time and red tape a new accounting standard creates, especially for smaller businesses.

For example, FASB now needs to know whether a lease is a financing lease or an operating lease. (A financing lease was previously known as a capital lease.)

The major difference is Topic 842 adds this defining characteristic to what constitutes a financing lease: “the asset leased is of such a technical nature that there could be no alternative use for the asset at the end of the lease.”

Many finance pros would prefer a return to the old days when an operating lease was a de facto expense on the balance sheet, and not a potential asset depending on the property’s value. Topic 842 lines up leased properties with capital leases for all intents and purposes.

One other potential tweak on the way: FASB may amend Topic 842 accounting requirements for leasehold improvements when the lease term is shorter than the useful life of the property.

Keep in mind: For any lease under 12 months, companies may expense the payment as incurred and exempt the lease from Topic 842 recording.

Topic 842 went into effect on January 1, and is effective for private companies for fiscal years starting after December 15, 2018.