BC2. The amendments in Update 2016-02 were issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing transactions. Since the issuance of the amendments in February 2016, the FASB has been assisting stakeholders with implementation questions and issues as organizations prepare to adopt Topic 842.
BC3. Stakeholders inquired about the application of Topic 842 to land easements. Their concerns primarily involved the cost and complexity of potentially having to evaluate all existing land easements at transition. Some entities reported having thousands of land easements going back many decades. A land easement, which represents the right to use, access, or cross another entity’s land for a specified purpose, may take different forms. For example, a land easement might be acquired for the right to pass a pipeline or other assets over, under, or through an existing area of land or body of water while allowing the landowner (or others) continued use of the land for other purposes (farming, hunting, and so forth) as long as the landowner (or others) does not interfere with the rights of the easement holder.
BC4. A land easement may be perpetual or term based, provide for exclusive use or nonexclusive use (shared use) of the land, and may be prepaid or paid over a defined term. A perpetual land easement provides the easement holder with the right to use specified property in perpetuity, generally subject to the condition that the easement holder must continue to use the land for the purpose specified in the arrangement.
BC5. In response to stakeholder questions about land easements, the FASB conducted outreach meetings and held a workshop on land easements with representatives from various industries and accounting firms that are most involved in land easement arrangements to better understand how land easements are currently accounted for under generally accepted accounting principles (GAAP). Stakeholders said that diversity in practice currently exists in accounting for land easements. While some entities currently apply Topic 840 to account for their land easements, other entities apply other guidance. For example, some entities account for prepaid land easements as costs incurred to bring the related asset (for example, a pipeline) to the condition and location necessary for its intended use (paragraph 360-10-30-1), while others account for prepaid land easements as intangible assets on the basis of the guidance in Example 10 in Subtopic 350-30 (paragraphs 350-30-55-29 through 55-32). Furthermore, some entities account for land easements paid over time as either executory contracts or finite life intangible assets, while others account for such easements as leases.
BC6. Stakeholders that do not currently apply Topic 840 for the accounting of their land easements said that it is unclear whether they should evaluate existing and future land easements under Topic 842 upon adoption of that Topic. They also said that evaluating all existing land easements under Topic 842 would be costly and complex and have limited benefits.
BC7. At its August 2, 2017 meeting, the Board discussed land easements and decided to address stakeholder concerns about the costs and complexity of complying with the transition requirements in Topic 842 by providing an optional transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under the current leases guidance in Topic 840.
BC8. On September 25, 2017, the Board issued proposed Accounting Standards Update, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842, for public comment, with a comment period that ended on October 25, 2017. The Board received 17 comment letters on the proposed Update, all of which generally supported the objective of providing transition relief for land easements to which Topic 840 had not previously been applied. In addition, all comment letters supported aligning the transition provisions of the proposed amendments with those in Update 2016-02.
BC9. At its November 29, 2017 meeting, the Board considered feedback received on the proposed Update and decided to proceed with the issuance of this final Update. In addition, some respondents to the proposed Update asked that the Board clarify how to apply the lease identification guidance in Topic 842 to land easements (specifically, the unit of account for lease identification purposes) once Topic 842 is effective. However, the Board did not consider this issue to be within the scope of the proposed amendments and it did not view the unit of account issue as being limited to land easements and, therefore, decided not to address it.