Land Easements—Guidance for Implementing New Lease Accounting Standards

A recent Accounting Standards Update (ASU) addresses land easements and their accounting under the new lease standards.  In January 2018, the Financial Accounting Standards Board (FASB) issued ASU 2018-01 Leases: Land Easement Practical Expedient for Transition to Topic 842 in order to provide additional transitional support to entities implementing the new lease accounting standards, Topic 842 (released as ASU 2016-02).

“Land easement” is the legal term for the right to use or occupy another entity’s land for a specified purpose.  In other words, a land easement is a right-of-way.  Take, for example, a hospital that has recently expanded an office building on its property to allow for a new physician practice to take up residence.  The new practice requires a parking lot.  However, the only space for the parking lot is on the back side of the building where the property abuts on a family-owned farm.  The hospital would like its patients to enter the parking lot directly from the back of the building for easier access.  However, this would necessitate the construction of a road on the neighbor’s property.  The neighbor could allow a land easement to the hospital, granting it the legal right to build and use a road on the neighbor’s property, while not actually taking legal possession of that road.

Topic 842 requires entities to evaluate land easements, such as the one described above, and decide if they qualify as a lease.  Many land easements do not actually meet the definition of a lease.  Evaluating all existing land leases could prove to be a costly and cumbersome endeavor for an entity.  Therefore, through ASU 2018-01, the FASB has elected to allow a practical expedient for land easements already in existence at the date Topic 842 is adopted.  In short, this update gives an entity the option to not evaluate under Topic 842 existing land easements that were not previously accounted for as leases under current guidance.  The entity can simply continue accounting for them in the manner they were previously.  If an entity elects to use the practical expedient, it will only need to evaluate new or modified easements under Topic 842, beginning on or after the date of adoption.  If the practical expedient is not elected, all existing land easements would require evaluation under the new lease accounting standards.  This evaluation could potentially result in the recognition of an additional lease asset and liability on the balance sheet.

The effective date for this ASU is the same as the new lease accounting standards.  ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, for public entities and certain not-for-profit entities that have issued securities or are a conduit bond obligor.  For all other entities, the effective date is for fiscal years beginning after December 15, 2019.

Need help implementing other areas of ASU 2016-02? Access our FASB New Lease Accounting Standards Podcast.

If you would like more information about this ASU, or would like to request a speaker for your organization or event, contact one of our PYA executives below at (800) 270-9629.


Mike Shamblin

Mike Shamblin

Managing Principal of Audit & Assurance Services

Matt Neilson

Matt Neilson


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