FASB proposes improvements to lease guidance on related party arrangements
The FASB has issued the proposed Accounting Standards Update (ASU), Leases (Topic 842), Common Control Arrangements. The FASB intends the amendments included in the proposal to improve accounting guidance for arrangements between entities under common control. The FASB requests that stakeholders review and provide comments on the proposed ASU by January 16, 2023.
Under Topic 842, entities must determine whether a related party arrangement between entities under common control is a lease and, if so, classify and account for the lease on the same basis as an arrangement with an unrelated party (that is, on the basis of legally enforceable terms and conditions). These requirements differ from the economic substance requirements of Topic 840, Leases, the predecessor standard to Topic 842.
During the FASB’s post-implementation review (PIR) of ASU No. 2016-02, Leases (Topic 842), private company stakeholders expressed concerns with applying Topic 842 to related party arrangements between entities under common control. Specifically, those areas are (1) which terms and conditions should be considered when determining whether a lease exists and, if so, the classification and accounting for the lease, and (2) the accounting for leasehold improvements associated with leases between entities under common control.
The proposed ASU would provide private companies and not-for-profit organizations that are not conduit bond obligors with a practical expedient that would allow those entities to use the written terms and conditions of an arrangement between entities under common control to determine whether a lease exists and, if so, the classification of and accounting for that lease.
The proposed ASU also would change the accounting for leasehold improvements associated with leases for all entities (i.e., including public companies) under common control. Leasehold improvements associated with those leases would be amortized by the lessee over the economic life of the leasehold improvements as long as the lessee controls the use of the leased asset.
The FASB will determine the effective date after consideration of stakeholder feedback, although the expectation is that the proposed amendments will be effective for all entities during interim periods within the fiscal year of adoption of a final ASU. If those entities have not yet applied Topic 842 in interim periods within the fiscal year of adoption of Topic 842, the amendments in a final ASU would not be applicable during those interim periods.