Land Easements Under ASC 842

• August 22, 2022
• Carey M. Heyman, CPA

As private companies continue down the path of adoption of the new lease standard (ASC 842), questions persist over the accounting treatment of land easements. Prior to the issuance of ASC 842, there was diversity in practice for the accounting of land easements, whether due to the perpetual nature of an agreement, terms of a contract or ambiguity around renewal options. Land easements could have been accounted for under the prior lease standard or recorded as an intangible or prepaid asset.

As a result, stakeholders expressed concerns to the Financial Accounting Standards Board (FASB) that implementation of the new lease standard would be costly and time consuming. In response to these concerns, the FASB issued Accounting Standards Update (ASU) 2018-01 and made it very clear that land easements should be evaluated under ASC 842.

ASU 2018-01 provides a practical expedient that can be used specifically for land easements. The practical expedient, if adopted, allows entities to avoid evaluating existing or expired land easements that were not previously accounted for as leases. If this practical expedient is applied, it must be done so consistently to all land easements in place at the time of adoption and must be properly disclosed. Furthermore, the reporting entity would continue to use their current accounting for those land easements, likely following either ASC 360, Property, Plant, and Equipment, or ASC 350, Intangibles – Goodwill and Other.

Even if the practical expedient is adopted, any new or modified land easements that an entity enters into after adoption must be assessed to determine whether the contract contains a lease, similar to any other new or modified contracts entered into. Upon the adoption of ASC 842, most leases, including those resulting from land easement contracts, will be recognized on the balance sheet as a right-of-use asset with a corresponding lease liability. While this practical expedient may be useful and save time at implementation, it could result in a mixed application of accounting policies to land easements over time.

It is really important to consider all of the factors before making a determination on how to best proceed with the accounting for land easements. If you have questions on this or any part of ASC 842, please contact us. You can also check out Lease Accounting Standard home page for a treasure trove of useful information.

Thanks to Renee Bardenwerper for authoring this blog post!

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