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FASB

Solar, Wind Farms Lauding New Accounting Rule for Certain Leases with Variable Payments

Denise Lugo  Editor, Accounting and Compliance Alert

Denise Lugo  Editor, Accounting and Compliance Alert

New FASB rules for reporting certain types of leases with variable payments has generated “extremely positive” response from solar and wind farms, many of which pushed for change, accounting practitioners said.

“Initial indications, are that this has been well received by the power utilities companies, especially solar and wind farms as this change better aligns the accounting for these impacted leases, that they have under [Topic] 842, with how they would have historically accounted for those leases under [Topic] 840, as a lessor,” Jon Eilertsen, Managing Director of BDO’s Accounting & Reporting Advisory Services practice, said on August 3, 2021.

The FASB on July 19 published Accounting Standards Update (ASU) No. 2021-05Leases (Topic 842): Lessors—Certain Leases with Variable Lease Payments, which takes effect for fiscal years beginning after December 15, 2021, for all companies, and interim periods within those fiscal years for public companies and interim periods within fiscal years beginning after December 15, 2022, for private companies and other entities.

“One of the main purposes here is to help alleviate the burden of recording a day one loss upon lease commencement for the lessor if the lease is classified as a sales type or direct financing lease,” Eilertsen said.

“The updates of the FASB here in the practical sense reverts the accounting back to where it’s more in line with how they would have accounted for these lease agreements as lessors under 840, which would bring these more in line with being operating leases, rather than sales type or direct financing leases with day one losses being recorded on the books,” he said.

ASU 2021-05 narrowly amends Topic 842, Leases, a major accounting standard that requires companies to report the full magnitude of their long-term lease obligations on the balance sheet.

Both the original lease standard and the amendment aim to provide additional clarity for investors surrounding operating leases – important especially for contracts where payments vary substantially.

Contracts for solar and for wind, for example, generally have a lot of variability – i.e. the wind doesn’t blow or there is a patch of significant cloud cover where the efficiency of the solar panel is not capturing the energy that the entity would expect to capture. This creates significant variability in the payment structure.

“As it relates to solar and wind, there’s just more variability from the amount of power that those facilities can generate, and so as it relates to being able to pinpoint fixed payments or variable payments that are based on indexes or rates when determining your required rent payments, this helps to better refine what payments are to be included in the analysis, because of the variability and amount of power to be produced. It’s difficult to pinpoint exactly what those payments will be for the energy that they will create, and from an output perspective, what energy will be able to be captured and subsequently purchased by a third party,” Eilertsen said. “And so to me, that’s where the variability lies specifically with solar and wind, what this update looks to address.”

For in-depth analysis of the FASB’s standard for lease accounting, please see Catalyst: US GAAP — Leases, also on Checkpoint.

Additional analysis of the lease standard can be found in the Accounting and Auditing Update Service[AAUS] No. 2016-15 and SEC Accounting and Reporting Update Service[SARU] No. 2016-13 (March 2016): Special Report: Accounting for Leases—an Explanation and Analysis of Accounting Standards Update No. 2016-02.

 

This article originally appeared in the August 4, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.

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