The Financial Accounting Standards Board voted to provide companies with a practical expedient for its leasing standard if they have related-party arrangements between entities under their common control.
FASB affirmed during a meeting Wednesday,
The practical expedient can be applied on an arrangement-by-arrangement basis. An entity applying the practical expedient isn't required to determine whether those written terms and conditions are legally enforceable. If no written terms and conditions exist, an entity is required to apply the leases standard on the basis of the legally enforceable terms of the arrangement.
FASB issued a
An entity adopting the practical expedient concurrently with adoption of the leases standard is required to adopt the practical expedient using the same transition method elected to adopt the leases standard. For all other entities, FASB decided that the practical expedient can be adopted either prospectively to all leases that begin on or after the date of adoption of the final accounting standards update, and retrospectively to the beginning of the earliest period presented in accordance with the leases standard for all arrangements that exist at the date of adoption of the final update. The amendments would not be applicable for arrangements that are no longer in place at the date of adoption of the final update.
FASB also affirmed its decision that an entity is allowed to document any existing unwritten terms and conditions of a common control arrangement before the date on which the entity's first interim (if applicable) or annual financial statements are available to be issued in accordance with the practical expedient.
The board decided that an entity electing the transition practical expedients isn't required to apply those expedients to common control arrangements for which the practical expedient is being applied.
FASB also decided that, for all entities, leasehold improvements associated with common control leases need to be amortized by the lessee over the useful life of the leasehold improvements to the common control group, as long as the lessee controls the use of the underlying asset through a lease. If the lessor obtained the underlying asset through a lease with another entity not within the same common control group, the amortization period can't exceed the lease term associated with the lessor's lease with the other entity.
It should also be accounted for as a transfer between entities under common control through an adjustment to equity (or net assets for not-for-profit entities), if and when the lessee no longer controls the use of the underlying asset. FASB also decided that those leasehold improvements are subject to the impairment guidance in the proposal.
"I think we are reflecting the economics of the leasehold improvement, and I also think we're reflecting the economics of the lease arrangement," said FASB vice chairman Jim Kroeker. "Again, we're only talking about parties under common control, so to think about inferring a longer lease that doesn't exist and report that — just to me doesn't reflect the economics. If there isn't a one-year lease, to then say let's infer that there might be an obligation, not a probable future outflow, but an actual obligation that doesn't exist to me isn't useful reporting. I think that comes through the related-party disclosures and the separate disclosure of the leasehold improvements."
FASB also affirmed its decision that a lessee should disclose information about leases in which the useful life of the leasehold improvements to the common control group is longer than the lease term.
"While we had expressed some concerns about the part of the proposal that requires lessees to depreciate leasehold improvements related to leases with parties that are under common control with the lessee over the useful life of the asset rather than the lease term, we are supportive overall of the FASB's dedication to providing relief where possible, especially to private companies, and we believe that this new standard will do that," said Angela Newell, deputy national managing partner of accounting at Top 10 Firm BDO USA.
FASB decided that the amendments will be effective for all entities for fiscal years starting after Dec. 15, 2023, including interim periods within those fiscal periods, but early adoption is allowed. The board also directed its staff to draft an accounting standards update for vote by written ballot.
"The first part of the proposal is that the private company, when they are a party to a lease, and the other party, whether they're the lessee or the lessor, the other side, is an entity that's under common control, they have a common parent, that they don't have to think hard about whether or not any written lease terms are enforceable or not," said Newell. "FASB received feedback from private companies saying that it's really hard to conclude on whether or not even if they're written terms, that they're legally enforceable when the other side is an entity under common control, because that common parent can decide to change their minds anytime they wanted, or just overrule the written terms or whatever. They said that it could involve legal counsel getting involved to try to make assessments about what's legally enforceable and what's not. And so the proposal just says that, look, if you've got two parties under common control, and there's a lease between them, then you can just rely on the written terms. Don't worry about whether they're enforced or not."
BDO didn't express particular concerns about that provision in its comment letter to FASB. The other half of the proposal about useful life presented some difficulties for the firm, however.
"It in essence divorces the useful life of any leasehold improvement from the lease terms," said Newell. "From a normal perspective, let's say you're leasing a building, and you've built out leasehold improvements. The standard basically says that the useful life of those assets is limited to the shorter of the actual economic life or the actual useful life of the lease term. It's a little bit circular, because if the useful life extends beyond the current term, but you have renewal options, that generally would make those renewal options reasonably certain to extend the term. But nonetheless, you can't say that, if my total potential lease term is only 10 years, but I've got an asset life of 15, I can't depreciate it over 15 years. I have to depreciate over 10. This proposal would basically divorce those two things and separate them as long as the lease was under common control."
