![aerial view of grasslands](https://www.cohnreznick.com/-/media/images/as_land-easement-article_web-banner_1024x250.jpg?h=250&iar=0&w=1024&hash=8CD98682526C4CF9871EFF82DE521093)
A land easement is a right to use, access or cross another entity’s land for a specified purpose (ASC 842-10-65gg.). Land easements, which are often referred to as rights of way, could be encountered in a fairly wide range of situations. For example:
- An entity may grant a land easement enabling another party to build a pipeline on land owned by the entity
- An entity could grant a land easement to a utility company to install power lines
- A railroad operator to lay train tracks
- An environmental easement that restricts the use of the land
Under a land easement, the landowner continues to own and generally has the right to use the land but conveys rights to the holder of the land easement to use a portion of such land for a specified purpose.
The FASB specifically decided to include land easements within the scope of Topic 842. According to ASC 842, the party granting the easement as well as the recipient of the right of way conveyed under such easement will both apply Topic 842 to determine whether the land easement is or contains a lease.
Land easements can occur with several different characteristics, such as perpetual use, or be term-based and/or provide an exclusive or non-exclusive right of way. In a perpetual land easement, the land easement holder has the right of way for a specified property for use in a specified way in perpetuity. Perpetual land easements are not in scope of Topic 842 because they lack a finite period of time that would be considered the term of the agreement and fail to meet the definition of a lease as a result.
Entities should carefully assess whether a land easement is within the scope of Topic 842 because some land easements may appear to be perpetual but actually have a defined term. For example, an agreement with a term that is non-cancelable that includes renewals on a periodic basis (e.g., annually or every 10 years) may in-substance be for a defined period of time with renewal options.
Transition to ASC 842 – Land easement practical expedient
A land easement practical expedient for transition to Topic 842 was provided by the FASB in ASU 2018-01 as a result of the Board’s post implementation review process, and in response to stakeholders’ concerns regarding the application of accounting standards for land easements prior to Topic 842 (ASU 2018-01). That is, not all companies applied lease accounting standards to land easements.
Transitioning to Topic 842 could be costly and time consuming to entities. To facilitate adoption, the FASB created an optional practical expedient available with the issuance of ASU 2018-01 - Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842. ASU 2018-01 differentiates land easements into two categories:
- Land easements that existed before the reporting entity’s adoption of Topic 842
- Land easements entered into or modified on or after the reporting entity’s adoption of Topic 842
A reporting entity “may elect a practical expedient to not assess whether existing or expired land easements that were not previously accounted for as leases under Topic 840 are or contain a lease,” as stated in Topic 842. An entity electing this practical expedient must apply it consistently to all of its existing and expired land easements not previously accounted for as leases under Topic 840. Those entities that elect this practical expedient will continue their current accounting for those land easements (i.e., ASC 360, Property, Plant, and Equipment or ASC 350, Intangibles—Goodwill and Other). A reporting entity that previously accounted for land easements as leases under Topic 840 would not be able to elect this practical expedient.
Almost all leases, including land easements within the scope of Topic 842, will be recognized on the balance sheet with a right-of-use asset and a lease liability measured at the discounted amount of lease payments payable over the lease term. Often, land easement transactions include payments made prior to the lease commencement date. Those payments, for land easements that are or contain a lease, will be initially recognized as a prepaid asset, which is included in the right-of-use asset on the balance sheet. Subsequent measurement, recognition of expense, presentation, and disclosure will be impacted by lease classification (i.e., operating or finance lease), which is determined at lease commencement date. For more information on adopting ASC 842 and its risk and challenges, visit our Lease Accounting Resource Center.
![Gordon](https://www.cohnreznick.com/-/media/images/people/gordon_chatterton_newbackground_website_thumbnail.jpg?h=480&iar=0&w=480&hash=A5656D460A24FA9A4D27AD1C0A25E450)
Gordon Chatterton
Contact
Let’s start a conversation about your company’s strategic goals and vision for the future.
Please fill all required fields*
Please verify your information and check to see if all require fields have been filled in.
![Lease](https://www.cohnreznick.com/-/media/images/services/advisory/leasing-2_spotlite_300x225.jpg?h=225&iar=0&w=300&hash=01D292B4DA96DC4111305A431DC600BD)
Lease Accounting Resource Center
![truck trucks lease accounting](https://www.cohnreznick.com/-/media/images/insights/lease-acctg-webinar_spotlight_300x250.jpg?h=250&iar=0&w=300&hash=D184640B9553D7894B5306EB7B9E7DF6)