Accounting Update to Ease Lessors’ Financial Reporting of Taxes

Changes to new lease accounting rules would clarify the financial reporting responsibilities for lessors of their taxes and also eliminate some of their drudge work.

The Financial Accounting Standards Board Oct. 31 approved several practical changes that will make it easier for lessors to implement new lease accounting rules that take effect next year.

The changes, which are expected to be finalized in mid-December, are intended to provide a simpler, less costly way to account for sales and property taxes stemming from leases.

The board clarified that lessors, which could be companies or real estate investment trusts, would not be required to assess tax laws in numerous jurisdictions, where the laws may differ over which party is responsible for paying the taxes.

“If the lessee is paying for it, don’t worry about it. If the lessor is paying for it, it’s a lessor cost,” said board member Christine Botosan during the board’s discussion.

Under the proposed changes, those companies would not have to account for any costs that their lessees pay directly to a third party, like property taxes or insurances costs. The change addresses concerns that companies had no way to know exactly what lessees were paying to third parties.

However, any costs that the lessor pays, like property taxes, and that would be reimbursed by the lessee, would be accounted for as a lessor cost.

The board also agreed that lessors would not have to account for sales and use taxes that they collect from their lessees as either revenue or an expense.

Other changed the board approved would clarify how companies would report revenue from lease and non-lease components of a contract.