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Standards Update: 2/27/18

February 27, 2018

The Financial Accounting Standards Board (FASB) regularly issues Accounting Standards Updates (ASUs) to make changes to the FASB Codification, the primary source of Accounting Principles Generally Accepted in the United States (GAAP). Below are select ASUs that were recently issued.

ASU No. 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842

Accounting Standards Update (ASU) No. 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842 (ASU 2018-01), was issued to help ease the implementation of the Topic 842 – Leases. ASU 2018-01 clarifies the application of the new leases guidance to land easements and eases adoption efforts for companies with land easements agreements.

Land easements (also known as rights of way) provide a company with the right to use, access, or cross another company’s land for a specified purpose as outlined in the agreement creating the land easement. Utility and telecommunication companies typically use land easements when they need to take a small portion of land (owned by another company), or easement, to bury wires that enable them to run their businesses. The accounting for these land easements has varied under GAAP, in that not all companies have historically accounted for land easements as leases.

Topic 842 requires companies to evaluate all old and existing land easements to determine if they meet the definition of a lease under the new standard. For some companies the number of land easements could be in the thousands (or even tens of thousands), which would put a significant cost on the implementation of Topic 842. To address these concerns, the FASB has issued ASU 2018-01.

ASU 2018-01 provides a specific practical expedient for companies that are involved in land easement transactions. ASU 2018-01 would not require an organization to reconsider their accounting for existing land easements that are not currently accounted for under the old lease standards. In addition, ASU 2018-01 clarifies that once an entity has adopted the provisions of Topic 842, it should apply those provisions prospectively to all new (or modified) agreements related to land easements. Topic 842 and ASU 2018-01 are both effective for private companies for years beginning after Dec. 15, 2019.

Accounting Standards Update (ASU) No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220)

The impact from the passing of the Tax Cuts and Jobs Act of 2017 (TCJA) is the largest single change to the Internal Revenue Tax Code since 1986. The impact from the new legislation does not just impact a company’s tax returns, but also its financial statements.

The FASB Accounting Standards Codification (ASC) 740-10-35-4 requires that deferred tax assets and liabilities be adjusted to account for any change in tax laws or rates within the period that the enactment of these changes occurs and any adjustments to flow through income from continuing operations. Since the adjustments due to TCJA are required to flow through income from continuing operations, the tax effects of items within accumulated other comprehensive income (AOCI), known now as “stranded tax effects,” do not reflect the appropriate tax rate. As such, FASB issued ASU No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02), in order to address these stranded income tax effects.

ASU 2018-02 provides financial statement preparers with an option to reclassify stranded tax effects from AOCI to retained earnings in each period in which the effect of change in the U.S. federal corporate tax rate included in TCJA is recorded.

ASU 2018-02 has the following additional financial statement disclosure requirements:

  • the company’s accounting policy for releasing income tax effects from AOCI into retained earnings,
  • whether the company has elected to reclassify the stranded income tax effects resulting from TCJA, and
  • information about the other income tax effects that are reclassified from AOCI by the company.

If a company does not elect to reclassify stranded tax effects of TCJA, ASU 2018-02 requires the company to disclose that the election was not made.

ASU 2018-02 affects any company that is required to apply the provisions of Topic 220, Income Statement—Reporting Comprehensive Income, and has items of other comprehensive income for which the related tax effects are presented in other comprehensive income as required by GAAP. ASU 2018-02 only applies to the reclassification of the income tax effects of TCJA.

The amendments are effective for all entities for fiscal years beginning after Dec. 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The amendments in ASU 2018-02 should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the TCJA is recognized.

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