Lease cost accounting rules to remain unchanged, for now

The leases accounting standard will not be amended to address a request posed by the utilities industry, the FASB decided on June 12, 2024. The industry requested that the board amend the standard to allow companies to capitalize lease costs incurred during construction, regardless of the leased asset's intended use.

Despite empathizing with the industry's concerns, the board ultimately voted 4 to 3 against adding the project, citing insufficient widespread support and potential complications that could arise from increased complexity and diversity in practice.

"I don't support adding a project," FASB member Christine Botosan said. "I view this as fairly settled accounting and I don't see a reason to open up the issue at this point in time," she said. "I actually believe the economics that we have today is probably pretty accurate. I don't think the economics is compelling to change."

The decision means that utilities companies will continue to expense lease costs during construction, unless the asset falls under the scope of real estate rules.

The topic came to the board due to current rules under Topic 842, Leases, and Topic 840 which do not allow for the capitalization of lease costs incurred during the construction period unless the asset being constructed is within the scope of Topic 970, Real Estate.

Utilities groups said this issue has become more prevalent due to the significant increase in renewable energy facilities, which are often constructed on leased land. The industry argued that the current accounting treatment results in inconsistent accounting for similar costs and that aligning the accounting requirements would provide more accurate financial reporting.

Meanwhile, during discussions, some board members suggested exploring the issue as part of the ongoing post-implementation review (PIR) of the leases standard, while others proposed an accounting policy alternative that would allow entities to choose to capitalize lease costs during construction. FASB Vice Chair James Kroeker expressed his view that the board should consider adding a project, emphasizing the importance of reflecting the total investment in accounting practices. "I would make it optional," he said. "I would start with looking at it broadly, considering both property and land, to capture the full scope of investments. I think it's better accounting."

The FASB may revisit the issue during the PIR if broader concerns about the definition of a lease or capitalization practices arise, the board signaled.

"My preference would be to look at the other issues that we have around the definition more broadly as part of PIR," FASB member Susan Cosper said. "There were many other companies and industries that were affected by this change in the definition."

We have partnered with Thomson Reuters to issue our monthly Accounting Insights. Please contact Baker Tilly if you have any questions related to these articles or Baker Tilly's Accounting and Assurance Services. ©2024 Thomson Reuters/Tax & Accounting. All Rights Reserved.

© 2024 Baker Tilly US, LLP