FASB Affirms Changes to Leases. ASU Expected By the End of March
On February 16th, 2023 the FASB board met to discuss a summary of the 29 comment letters received in response to the proposed Accounting Standards Update, Leases Topic 842: Common Control Arrangements, which was issued for comment on November 30, 2022.
The Board unanimously agreed to affirm its decisions on Issue 1, a proposed practical expedient for private entities and nonprofits without conduit debt under common control arrangements. These entities can use written terms and conditions of an arrangement between entities under common control to apply Topic 842, which can be applied on an arrangement-by-arrangement basis. If no written terms and conditions exist for the lease, the entity would not be permitted to apply the practical expedient and would use the legally enforceable terms and conditions to apply Topic 842.
In addition, the Board voted 4-3 on Issue 2 to change the accounting for leasehold improvement amortization for all organizations, including public entities. As a result, leasehold improvements between entities under common control will be amortized over the useful life of the leasehold improvements (regardless of the lease terms) as long as the lessee controls the use of the underlying asset through the lease. The Board did vote to use the term useful life in lieu of economic life which was used in the exposure draft.
The Board also voted unanimously to use an effective date for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. However, early adoption will be permitted even for those who have not yet adopted the standard who could adopt immediately. The FASB stated that the ASU is expected by the end of March.
Reminder - entities can't adopt an ASU until it is issued! Organizations cannot adopt based on the public vote. We don't want any peer review issues related to this late-breaking change!
We hope this timely alert helps you as many entities are currently working on their 842 transitions.