17.3 FASB Activities
This Roadmap discusses the FASB’s standard setting through September 30, 2023.
17.3.1 Final ASUs and Expected Proposed ASU
As noted above, the FASB has released various final and proposed ASUs to amend and clarify the
guidance in ASC 842. These final and proposed standards, which were largely issued in response to
stakeholder feedback, are discussed throughout this Roadmap as applicable.
- ASU 2017-13 on amendments to SEC paragraphs (Section 17.3.1.1).
- ASU 2018-01 on the land easement practical expedient for transition (Section 17.3.1.2).
- ASU 2018-10 on technical corrections and improvements (Section 17.3.1.3).
- ASU 2018-11 on targeted improvements (Section 17.3.1.4).
- ASU 2018-20 on narrow-scope improvements for lessors (Section 17.3.1.5).
- ASUs 2016-13 and 2018-19 on TRG activities — billed operating lease receivables (Section 17.3.1.6).2
- ASU 2019-01 on Codification improvements (Section 17.3.1.7).
-
ASUs 2019-10 and 2020-05 on deferrals of the effective dates of the leasing standard (Section 16.1).
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ASU 2020-02 on amendments to ASC 842 in response to SEC guidance (Section 18.4).
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ASU 2021-05 on the lessor’s accounting for leases with variable lease payments (Section 17.3.1.8).
-
ASU 2021-09 on improvement of discount rate practical expedient for lessees that are not PBEs (Section 17.3.1.9).
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ASU 2023-01 on improvements for related-party leases under common control (Section 17.3.1.10).
17.3.1.1 ASU 2017-13 on Amendments to SEC Paragraphs
In September 2017, the FASB issued ASU 2017-13, which rescinds certain SEC guidance in light of ASUs
2014-09 and 2016-02. Specifically, ASU 2017-13 rescinds the following SEC guidance upon the adoption
of ASU 2016-02:
- ASC 840-30-S99-1 on a lessor’s consideration of third-party value guarantees.
- ASC 840-40-S99-1 on sale treatment in sale-and-leaseback transactions with a repurchase option.
- ASC 840-40-S99-2 on the effect of the lessee’s involvement in asset construction.
- ASC 840-40-S99-3 on applying sale-and-leaseback guidance to certain sale-and-leaseback transactions.
In addition, ASU 2017-13 moved certain guidance in ASC 840-30-S99-2 on the effect of a change in tax
law or rates on leveraged leases, which resulted from an SEC observer comment, to ASC 842-50-S99-1.
ASU 2017-13 also codified in ASC 842-10-S65-1 comments made by the SEC observer at the July 20,
2017, EITF meeting. In those comments, the SEC staff announced that it would not object when certain
PBEs elect to use the non-PBE effective dates solely to adopt the FASB’s new standards on revenue and
leases. See Section 18.4 for further discussion of this election.
17.3.1.2 ASU 2018-01 on the Land Easement Practical Expedient for Transition
The FASB received a significant amount of feedback from stakeholders in several industries who were concerned about the cost and complexity of evaluating all existing land easements under ASC 842’s definition of a lease at transition. Entities in these industries have potentially tens of thousands of existing land easements, many of which were executed decades ago, and the same complexities described in Section 2.4.3 would be relevant to these arrangements.
The Board observed that the costs of requiring an entity to evaluate all existing land easements under ASC 842’s definition of a lease outweighed the benefits to financial statement users. Accordingly, the FASB provided transition relief in the form of a practical expedient in ASC 842-10-65-1(gg):
An entity also 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 under this Topic. For purposes of (gg), a land easement (also commonly referred to as a right of way) refers to a right to use, access, or cross another entity’s land for a specified purpose. This practical expedient shall be applied consistently by an entity to all its existing and expired land easements that were not previously accounted for as leases under Topic 840. This practical expedient may be elected separately or in conjunction with either one or both of the practical expedients in (f) and (g). An entity that elects this practical expedient for existing or expired land easements shall apply the pending content that links to this paragraph to land easements entered into (or modified) on or after the date that the entity first applies the pending content that links to this paragraph as described in (a) and (b). An entity that previously accounted for existing or expired land easements as leases under Topic 840 shall not be eligible for this practical expedient for those land easements.
In short, an entity that elects the expedient is relieved from applying ASC 842
to evaluate all existing land easements that were not previously accounted for in
accordance with ASC 840. The FASB explains in paragraph BC15 of ASU 2018-01 that an
entity may thus elect to “run off” all such easements by using its historical accounting
approach for land easements unless or until the arrangement is modified on or after the
date on which the entity adopts ASU 2016-02.
The objectives of the land easement amendments in ASU 2018-01 are to:
-
Clarify that land easements entered into (or existing land easements modified) on or after the effective date of ASC 842 must be assessed under ASC 842.
-
Provide a transition practical expedient for existing or expired land easements that were not previously accounted for in accordance with ASC 840. The practical expedient would allow entities to elect not to assess whether those land easements are, or contain, leases in accordance with ASC 842 when transitioning to ASC 842.
The amendments in ASU 2018-01 do not, and are not intended to:
- Provide illustrative or application guidance on whether land easements are, or contain, leases in accordance with the definition of a lease in ASC 842.
- Help entities identify the appropriate accounting framework for situations in which a land easement is not determined to be a lease under ASC 842.
See Section 2.4 for more information about the land easement practical expedient for transition.
17.3.1.2.1 Scope
ASU 2018-01 only addresses land easements. Although the FASB does not define this term, ASC 842-10-
65-1(gg) and paragraph BC3 of ASU 2018-01 describe both a land easement and a right of way as a
“right to use, access, or cross another entity’s land for a specified purpose.”
Further, ASU 2018-01 effectively breaks land easements into two groups on the basis of the effective
date of ASU 2016-02: (1) land easements entered into (or existing easements modified) on or after the
effective date (collectively, “new land easements”) and (2) land easements that existed as of, or expired
before, the effective date (collectively, “existing land easements”). See Section 2.4.2 for further discussion
of the scope of ASU 2018-01.
17.3.1.2.2 Identifying a Lease
ASU 2018-01 is not intended to provide illustrative or application guidance about whether new land easements meet the definition of a lease in ASC 842. Therefore, stakeholders and respondents may continue to raise questions about the application of the definition of a lease to new land easement arrangements, and it is possible that the FASB, IASB, and SEC staffs will want to share their perspectives as those questions are raised. Companies involved in land easement arrangements should consult with their accounting advisers and monitor developments on the topic. See Section 2.4.3 for further discussion of whether new land easements meet the definition of a lease in ASC 842.
17.3.1.2.3 Effective Date and Transition
The transition practical expedient for existing land easements may be elected
alone or with any of the other transition practical expedients. In a manner consistent
with the other transition practical expedients, entities must disclose whether they
are electing the transition practical expedient for land easements.
The effective date of ASU 2018-01 is aligned with that of ASU 2016-02. See
Section 16.5.3 for more
information about the effective date and transition provisions of ASU 2018-01.3
17.3.1.3 ASU 2018-10 on Technical Corrections and Improvements
In July 2018, the FASB issued ASU 2018-10 to make narrow-scope amendments
(i.e., minor changes and clarifications) to certain aspects of the leasing standard
(i.e., ASC 842). The table below, reproduced from ASU 2018-10, summarizes the 16
amendments that were made to ASC 842.
|
Area for Improvement
|
Summary of Amendments
|
|---|---|
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Issue 1: Residual Value Guarantees
| |
|
Stakeholders noted that paragraph 460-10-60-32 incorrectly
refers readers to the guidance in Topic 842 about
sale-[and-]leaseback-sublease transactions, when, in fact, it should refer
readers to the guidance about guarantees by a seller-lessee of the
underlying asset’s residual value in a sale and leaseback transaction.
|
The amendment corrects the cross-reference in paragraph
460-10-60-32. [See Section
10.3.1.2 of this Roadmap.]
|
|
Issue 2: Rate Implicit in the Lease
| |
|
Stakeholders raised questions about the treatment of
certain sales-type leases with significant variable payments under Topic 842
and whether the application of Topic 842 could result in a negative rate
implicit in the lease, rather than a loss at the commencement date of the
lease.
|
The amendment clarifies that a rate implicit in the lease
of zero should be used when applying the definition of the term rate
implicit in the lease results in a rate that is less than zero. [See
Sections
7.3.1 and 9.3.7.1 of this Roadmap.]
|
|
Issue 3: Lessee Reassessment of
Lease Classification
| |
|
Topic 842 is clear that when a lease is modified and that
modification is not accounted for as a separate contract, an entity (that
is, a lessee or a lessor) should reassess, at the effective date of the
modification, lease classification on the basis of the modified terms and
conditions and the facts and circumstances existing as of that date.
Although Topic 842 also requires a lessee to reassess lease classification
if there is a change in the lease term or the assessment of a lessee option
to purchase the underlying asset, stakeholders expressed that it is not
clear whether the lessee should reassess lease classification on the basis
of the facts and circumstances existing as of the date the reassessment is
required.
|
The amendment consolidates the requirements about lease
classification reassessments into one paragraph and better articulates how
an entity should perform the lease classification reassessment, that is, on
the basis of the facts and circumstances, and the modified terms and
conditions, if applicable, as of the date the reassessment is required. [See
Sections 8.3,
8.3.4, and
8.6.3 of this
Roadmap.]
|
|
Issue 4: Lessor Reassessment of
Lease Term and Purchase Option
| |
|
Topic 842 requires a lessor to not reassess the lease term
or a lessee purchase option unless the lease is modified and that
modification is not accounted for as a separate contract. Topic 842 also
requires a lessor to account for the exercise of a lessee option to extend
or terminate the lease, or to purchase the underlying asset, in the same
manner as a lease modification. Stakeholders questioned why a lessor should
account for a lessee exercise of such options in a manner similar to a lease
modification when the exercise of those options is consistent with the
assumptions that the lessor made in accounting for the lease at the
commencement date of the lease (or the most recent effective date of a
modification that is not accounted for as a separate contract).
|
The amendment clarifies that a lessor should account for
the exercise by a lessee of an option to extend or terminate the lease or to
purchase the underlying asset as a lease modification unless the exercise of
that option by the lessee is consistent with the assumptions that the lessor
made in accounting for the lease at the commencement date of the lease (or
the most recent effective date of a modification that is not accounted for
as a separate contract). [See Section 5.4.2 of this Roadmap.]
|
|
Issue 5: Variable Lease Payments
That Depend on an Index or a Rate
| |
|
Stakeholders noted that the guidance in paragraph
842-10-35-4(b) about remeasurement of the lease payments when a contingency
upon which some or all of the variable lease payments are based is resolved
might be perceived as applying to any variable lease payments, including
those that depend on an index or rate, which would be inconsistent with the
Board’s decisions on this issue.
|
The amendment clarifies that a change in a reference index
or rate upon which some or all of the variable lease payments in the
contract are based does not constitute the resolution of a contingency
subject to the guidance in paragraph 842-10-35-4(b).
Variable lease payments that depend on an index or a rate
should be remeasured, using the index or rate at the remeasurement date,
only when the lease payments are remeasured for another reason (that is,
when one or more of the events described in paragraph 842-10-35-4(a) or (c)
occur or when a contingency unrelated to a change in a reference index or
rate under paragraph 842-10-35-4(b) is resolved). [See Sections 6.3 and
8.5.3.2 of
this Roadmap.]
|
|
Issue 6: Investment Tax Credits
| |
|
Stakeholders indicated that there is an inconsistency in
terminology used about the effect that investment tax credits have on the
fair value of the underlying asset between the definition of the term rate
implicit in the lease and the lease classification guidance in paragraph
842-10-55-8.
|
The amendment removes that inconsistency in terminology.
[See Sections 8.3.3.6.2 and 9.2.1.4 of this
Roadmap.]
|
|
Issue 7: Lease Term and Purchase
Option
| |
|
Stakeholders indicated that the description in paragraph
842-10-55-24 about lessor-only termination options is inconsistent with the
description in paragraph 842-10-55-23 about the noncancellable period of a
lease.
|
The amendment removes that inconsistency by clarifying
that the period covered by a lessor-only option to terminate the lease is
included in the lease term. [See Section 5.2.4.1 of this Roadmap.]
|
|
Issue 8: Transition Guidance for
Amounts Previously Recognized in Business Combinations
| |
|
Stakeholders indicated that the transition guidance for
lessors in paragraph 842-10-65-1(h)(3) is unclear because it relates to
leases classified as direct financing leases or sales-type leases under
Topic 840, while the lead-in sentence to paragraph 842-10-65-1(h) provides
transition guidance for leases classified as operating leases under Topic
840.
|
The amendment clarifies that paragraph 842-10-65-1(h)(3)
applies to lessors for leases classified as direct financing leases or
sales-type leases under Topic 842, not Topic 840. In other words, paragraph
842-10-65-1(h)(3) applies when an entity does not elect the package of
practical expedients in paragraph 842-10-65-1(f), and, for a lessor, an
operating lease acquired as part of a previous business combination is
classified as a direct financing lease or a sales-type lease when applying
the lease classification guidance in Topic 842. The amendment also
cross-references to other transition guidance applicable to those changes in
lease classification for lessors. [See Section 16.10 of this Roadmap.]
|
|
Issue 9: Certain Transition
Adjustments
| |
|
When an entity initially applies Topic 842 retrospectively
to each prior reporting period and does not elect the package of practical
expedients in Topic 842, paragraph 842-10-65-1(p) requires a lessee to write
off, as an adjustment to equity, any unamortized initial direct costs that
do not meet the definition of initial direct costs under Topic 842 for
leases previously classified as operating leases under Topic 840.
Stakeholders questioned why those nonqualifying costs should be charged to
equity when those costs are incurred after the beginning of the earliest
period presented in the financial statements in which an entity adopts Topic
842. Similar issues also were noted elsewhere in the transition guidance
when an entity initially applies Topic 842 retrospectively to each prior
reporting period.
|
The amendments clarify whether to recognize a transition
adjustment to earnings rather than through equity when an entity initially
applies Topic 842 retrospectively to each prior reporting period. [See
Sections
16.3.1, 16.3.2.1.1, 16.3.2.2, 16.4.1, 16.4.2, and 16.4.4 of this Roadmap.]
|
|
Issue 10: Transition Guidance for
Leases Previously Classified as Capital Leases Under Topic 840
| |
|
Paragraph 842-10-65-1(r) provides guidance to lessees for
leases previously classified as capital leases under Topic 840 and
classified as finance leases under Topic 842. Paragraph 842-10-65-1(r)(4)
provides subsequent measurement guidance before the effective date when an
entity initially applies Topic 842 retrospectively to each prior reporting
period, but it refers readers to the subsequent measurement guidance in
Topic 840 about operating leases. It should refer them to the subsequent
measurement guidance applicable to capital leases.
|
The amendment corrects that reference. [See Section 16.3.2.1.2 of
this Roadmap.]
|
|
Issue 11: Transition Guidance for
Modifications to Leases Previously Classified as Direct Financing or
Sales-Type Leases Under Topic 840
| |
|
Paragraph 842-10-65-1(x) provides transition guidance
applicable to lessors for leases previously classified as direct financing
leases or sales-type leases under Topic 840 and classified as direct
financing leases or sales-type leases under Topic 842. For modifications to
those leases beginning after the effective date, paragraph 842-10-65-1(x)(4)
refers readers to other applicable guidance in Topic 842 to account for the
modification, specifically paragraphs 842-10-25-16 through 25-17, depending
on how the lease is classified after the modification. Stakeholders noted
that it should refer to how the lease is classified before the
modification to be consistent with the guidance provided in paragraphs
842-10-25-16 through 25-17.
|
The amendment corrects that inconsistency. [See Section 16.4.3 of this
Roadmap.]
|
|
Issue 12: Transition Guidance for
Sale and Leaseback Transactions
| |
|
Stakeholders noted that the heading above the transition
guidance on sale and leaseback transactions appears to suggest that there is
no transition guidance for sale and leaseback transactions that occur after
the earliest comparative period presented in the financial statements in
which an entity adopts Topic 842 but before the effective date. Some
stakeholders also questioned some of the references included in paragraph
842-10-65-1(bb).
|
The amendments clarify that the transition guidance on
sale and leaseback transactions in paragraph 842-10-65-1(aa) through (ee)
applies to all sale and leaseback transactions that occur before the
effective date and corrects the referencing issues noted. [See Section 16.9 of this
Roadmap.]
|
|
Issue 13: Impairment of Net
Investment in the Lease
| |
|
Paragraph 842-30-35-3 provides guidance to lessors for
determining the loss allowance of the net investment in the lease and
describes the cash flows that should be considered when the lessor
determines that loss allowance. Stakeholders questioned whether the
guidance, as written, would accelerate and improperly measure the loss
allowance because the cash flows associated with the unguaranteed residual
asset appear to be excluded from the evaluation.
|
The amendment clarifies the application of the guidance
for determining the loss allowance of the net investment in the lease,
including the cash flows to consider in that assessment. [See Section 9.3.7.5 of this
Roadmap.]
|
|
Issue 14: Unguaranteed Residual
Asset
| |
|
Paragraph 842-30-35-4 provides guidance explaining that if
a lessor sells the lease receivable associated with a direct financing lease
or a sales-type lease and retains an interest in the residual value of the
asset, the lessor should not continue to accrete the unguaranteed residual
asset to its estimated value over the remaining lease term. Stakeholders
questioned whether the Board intended to change the application as compared
with current generally accepted accounting principles (GAAP) because the
guidance in paragraph 840-30-35-53 (which will be superseded by the
amendments in Update 2016-02) requires a lessor to continue to recognize
interest resulting from accretion of the unguaranteed residual asset to its
estimated value unless the lessor sells substantially all of the minimum
rental payments.
|
The amendment clarifies that a lessor should not continue
to accrete the unguaranteed residual asset to its estimated value over the
remaining lease term to the extent that the lessor sells substantially all
of the lease receivable associated with a direct financing lease or a
sales-type lease, consistent with Topic 840. [See Section 9.3.7.6 of this Roadmap.]
|
|
Issue 15: Effect of Initial Direct
Costs on the Rate Implicit in the Lease
| |
|
Stakeholders noted that the ordering of the illustration
in Case C of Example 1 in paragraphs 842-30-55-31 through 55-39 has raised
questions about how initial direct costs factor into determining the rate
implicit in the lease for lease classification purposes for lessors
only.
|
The amendment more clearly aligns the illustration to the
guidance in paragraph 842-10-25-4. [See Sections 9.3.7.1.2 and 9.3.8.1 of this
Roadmap.]
|
|
Issue 16: Failed Sale and Leaseback
Transaction
| |
|
In accordance with Subtopic 842-40, Leases — Sale and
Leaseback Transactions, when a sale and leaseback transaction does not
qualify as a sale, the entity should account for the transaction as a
financing arrangement. Paragraph 842-40-30-6(a) further requires a
seller-lessee to adjust the interest rate as necessary to prevent negative
amortization of the financial liability recognized. Some stakeholders
questioned whether the language used in paragraph 842-40-30-6(a) actually
meets the objective of preventing negative amortization of the financial
liability recognized by a seller-lessee in a failed sale and leaseback
transaction.
|
The amendment clarifies that a seller-lessee in a failed
sale and leaseback transaction should adjust the interest rate on its
financial liability as necessary to ensure that the interest on the
financial liability does not exceed the total payments (rather than the
principal payments) on the financial liability. This clarification is also
reflected in the relevant illustration on failed sale and leaseback
transactions that is contained in Subtopic 842-40. [See Sections 10.4.2.1 and
10.4.2.3 of
this Roadmap.]
|
17.3.1.3.1 Effective Date and Transition
The effective date of the amendments in ASU 2018-10 is aligned with that of ASU
2016-02.4 For entities that have early adopted ASC 842, the ASU is effective upon issuance
and its transition requirements are the same as those in ASC 842.
17.3.1.4 ASU 2018-11 on Targeted Improvements
In July 2018, the FASB issued ASU 2018-11 to provide entities with relief
from the costs of implementing certain aspects of the leasing standard. Specifically,
under the amendments in ASU 2018-11:
-
Entities may elect not to recast their comparative periods in the period of adoption when transitioning to ASC 842.
-
Lessors may elect not to separate lease and nonlease components when certain conditions are met.
The scope of the amendments in the ASU is as follows:
- Transition relief — These amendments, which allow entities to report the comparative periods presented in the period of adoption under ASC 840, affect all entities with lease contracts that elect not to restate their comparative periods in transition.
- Lessor relief — These amendments, which give lessors the option of electing, as a practical expedient by class of underlying asset, not to separate the lease and nonlease components of a contract, only affect lessors whose lease contracts meet certain criteria (discussed below).
Note that while the transition relief amendments may benefit both lessees and lessors, the lessor relief amendments will benefit only lessors.
17.3.1.4.1 Transition Relief
ASC 842, as initially issued, required entities to use a “modified retrospective” transition approach that is intended to maximize comparability and be less complex than a full retrospective approach. See Chapter 16 for further discussion of the effective date and transition guidance.
Under the modified retrospective approach, ASC 842 is effectively implemented as of the beginning of the earliest comparative period presented in an entity’s financial statements. That is, a public entity for which the standard becomes effective on January 1, 2019, would first apply ASC 842 and recognize an adjustment for the effects of the transition as of January 1, 2017 (i.e., the date of initial application).
However, ASU 2018-11 amends ASC 842 so that entities may elect not to recast
their comparative periods in transition (the Comparatives Under 840 Option).
Effectively, ASU 2018-11 allows entities to change their date of initial application
to the beginning of the period of adoption of ASC 842 (e.g., January 1, 2019, for a
calendar-year PBE). In doing so, the entity would:
-
Apply ASC 840 in the comparative periods.
-
Provide the disclosures required by ASC 840 for all periods that continue to be presented in accordance with ASC 840.
-
Recognize the effects of applying ASC 842 as a cumulative-effect adjustment to retained earnings as of the effective date (e.g., January 1, 2019); under the Comparatives Under 840 Option, this date would represent the date of initial application.
The entity would not:
- Restate comparative periods for the effects of applying ASC 842.
- Provide the disclosures required by ASC 842 for the comparative periods.
- Change how the transition requirements apply, only when the transition requirements apply.
17.3.1.4.1.1 Effective Date and Transition
The transition relief amendments in ASU 2018-11 apply to entities that have not
yet adopted ASC 842.5 Entities that have early adopted ASC 842 cannot elect the Comparatives Under
840 Option.
See Sections 16.1.1
and 16.11 for further
discussion of the transition relief amendments in ASU 2018-11, including the related
disclosure requirements.
17.3.1.4.2 Lessor’s Separation of Lease and Nonlease Components
ASU 2016-02, as initially issued, required lessors to separate lease and nonlease components in all
circumstances. Once separate components were identified, lessors were required to use the relative
stand-alone selling price allocation method in ASC 606 to allocate the consideration in the contract to
the separated components. ASC 842 (including its presentation and disclosure guidance) applied to
the lease component, while other guidance, typically ASC 606 (including its presentation and disclosure
guidance), applied to the nonlease component.
As a result of feedback received from stakeholders indicating that the costs of complying with the
separation and allocation requirements for lessors outweigh the benefits, the FASB amended ASC 842
to give lessors the option of electing a practical expedient under which they would not be required to
separate lease and nonlease components, provided that the nonlease component(s) otherwise would
be accounted for under the revenue guidance in ASC 606 and both of the following conditions are
met:
- Criterion A — The timing and pattern of transfer for the lease component are the same as those for the nonlease components associated with that lease component.
- Criterion B — The lease component, if accounted for separately, would be classified as an operating lease.
The practical expedient can be elected by class of underlying asset and should be applied, as of the date
elected, to all transactions within those classes of underlying assets that qualify for the expedient.
Further, ASC 842-10-15-42C clarifies that the presence of a nonlease component that is ineligible for
the practical expedient does not preclude a lessor from electing the expedient for the lease component
and nonlease component(s) that meet the criteria. Rather, the lessor would account for the nonlease
components that do not qualify for the practical expedient separately from the combined lease and
nonlease components that do qualify.
See Section 4.3.3.2
for more information about the practical expedient related to a lessor’s separation of
lease and nonlease components.
17.3.1.4.2.1 Disclosure Requirements
When a lessor elects the practical expedient to combine lease and nonlease components in a contract,
it is required to provide certain disclosures. Such disclosures include (1) the lessor’s election to combine
lease components with associated nonlease components, (2) the class(es) of underlying asset(s) for
which the election was made, (3) the nature of the items that are being combined, (4) any nonlease
components that were not eligible for the practical expedient, and (5) which standard applies to the
combined component (i.e., ASC 842 or ASC 606). (See Section 15.3.2.4 for additional discussion of the
disclosure requirements related to ASU 2018-11.)
17.3.1.4.2.2 Effective Date and Transition
For entities that have not yet adopted ASU 2016-02, the effective date of ASU
2018-11 is aligned with the leasing standard’s effective date and transition
requirements.6
Upon transition to ASU 2018-11, a lessor electing the practical expedient would be required to apply it to all new and existing transactions within a class of underlying asset that qualify for the expedient as of the date elected. That is, a lessor would not be permitted to apply the practical expedient only to new or modified transactions within a class of underlying asset. See Section 16.4.6 for further discussion of transition requirements related to ASU 2018-11.
17.3.1.5 ASU 2018-20 on Narrow-Scope Improvements for Lessors
In December 2018, the FASB issued ASU 2018-20, which addresses certain concerns raised by lessors regarding the guidance in ASU 2016-02. Specifically, ASU 2018-20 includes amendments related to the following items:
- Item 1 — “Sales taxes and other similar taxes collected from lessees.”
- Item 2 — “Certain lessor costs.”
- Item 3 — “Recognition of variable payments for contracts with lease and nonlease components.”
17.3.1.5.1 Sales Taxes and Other Similar Taxes Collected From Lessees
Under ASC 606, as amended by ASU 2016-12, entities can elect an accounting policy of presenting sales taxes collected from customers on a net basis. Specifically, ASC 606-10-32-2A states, in part:
An entity may make an accounting policy election to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer (for example, sales, use, value added, and some excise taxes).
As issued, ASU 2016-02 did not provide lessors with a similar practical
expedient for sales taxes collected from lessees. Feedback from stakeholders cited
operational challenges with applying the leasing guidance without such an expedient.
Stakeholders noted that although lessors are not within the scope of ASC 606, they are
performing a revenue-generating activity in a manner similar to a service accounted
for under ASC 606. Therefore, these stakeholders requested that the FASB provide a
similar practical expedient under which lessors could elect to present sales taxes
collected from lessees on a net basis.
Accordingly, ASU 2018-20 offers lessors an accounting policy election under
which they can exclude from lease revenue sales taxes and other similar taxes assessed
by a governmental authority and collected by the lessor from a lessee. This is a
policy election by the entity. Lessors making this accounting policy election must
disclose that they have done so in addition to complying with the disclosure
requirements in ASC 235-10-50-1 through 50-6. See Section 15.3.6 for further details about the
disclosure requirements in ASU 2018-20 and Section
4.4.2.1.3 for a general discussion of ASU 2018-20.
17.3.1.5.2 Lessor Costs
A lessor may incur various costs in its role as a lessor or as owner of the underlying asset. A requirement
for the lessee to pay those costs, whether directly to a third party on behalf of the lessor or as a
reimbursement to the lessor, does not transfer a good or service to the lessee separately from the right
to use the underlying asset. ASU 2016-02, as initially issued, required a lessor to report those amounts,
regardless of the payor, as revenue and expenses.
Under ASC 606, an entity must evaluate whether it is acting as the principal or
the agent in the transaction to determine whether revenue should be presented on a
gross or net basis. However, after the issuance of the revenue standard, stakeholders
raised questions about whether an entity should be required to estimate gross revenue
when it is acting as the principal but there is uncertainty in the transaction price
that is not expected to ultimately be resolved. As a result, when the FASB issued
amendments to the principal-versus-agent guidance in ASU 2016-08, it specifically addressed this
question in paragraph BC38(c) of the Background Information and Basis for Conclusions
of that ASU:
The determination of whether revenue may be estimated or not is
based on an assessment of the transaction price guidance in Section 606-10-32 on
measurement (such as, the amount of consideration which the entity expects to be
entitled to for transferring promised goods or services to a customer and the
constraint on variable consideration). The guidance on variable consideration is
instructive as to whether amounts should be recognized as revenue. A key tenet of
variable consideration is that at some point the uncertainty in the transaction
price ultimately [will] be resolved. When the uncertainty is not expected to
ultimately be resolved, the guidance indicates that the difference between the
amount to which the entity is entitled from the intermediary and the amount
charged by the intermediary to the end customer is not variable consideration and,
therefore, is not part of the entity’s transaction price.
In light of the guidance in the Background Information and Basis for Conclusions of ASU 2016-08,
some lessor stakeholders requested that the FASB provide a similar accounting policy election under
which lessors would not be required to recognize lease revenue (and the corresponding expense) for
certain costs that are considered lessor costs under ASC 842.
Accordingly, ASU 2018-20 addresses stakeholder concerns about the challenges related to determining
costs paid by lessees directly to third parties on behalf of lessors by requiring lessors to exclude such
costs from variable payments, and thus from lease revenue. Lessor costs are not a component in the
contract because they are neither lease components nor nonlease components (e.g., services). Some
common examples of lessor costs include property taxes and insurance in a real estate lease.
Although stakeholders requested a policy election, the amendments in ASU 2018-20
indicate that lessor costs that are paid directly to a third party by a lessor and
then reimbursed by the lessee must be accounted for as
variable payments. Paragraph BC28 of ASU 2018-20 notes that “[a]lthough the economics
between Lessee-Paid and Lessee-Reimbursed are similar in that both may be costs of the
lessor, the Board highlighted that all Lessee-Reimbursed costs are known amounts to
the lessor and concluded that those costs should be accounted for as lessor
costs.”
See Section 4.4.2.1.2 for a detailed
discussion of ASU 2018-20.
17.3.1.5.3 Recognition of Variable Payments for Contracts With Lease and Nonlease Components
ASU 2016-02 initially required lessors to recognize variable payments “in profit or loss in the period when changes in the facts and circumstances on which the variable payment is based occur,” regardless of whether the variable payment is related to the lease or nonlease component in the contract.
Stakeholders observed that the guidance, as originally issued, may lead a lessor to recognize as revenue a variable payment related to a nonlease component before the nonlease component is transferred to the customer. That is, as issued, ASC 842-10-15-40, read literally, implied that as soon as an uncertainty that created variability in the consideration is resolved, that amount should be recognized as revenue regardless of whether the item to which it is related has been delivered to the customer-lessee.
To clarify the paragraph’s intent, ASU 2018-20 amended ASC 842 to require a
lessor to allocate (rather than recognize) certain variable payments to the lease and
nonlease components when the changes in facts and circumstances on which the variable
payment is based occur. After the allocation, the amount of variable payments
allocated to the lease component would be “recognized as income in profit or loss in
accordance with this Topic [ASC 842], while variable payment amounts allocated to
nonlease component(s) [would] be recognized in accordance with other Topics (for
example, Topic 606 . . .).”
See Section 4.4.2.2
for more information about allocating the consideration in the contract and
recognizing variable payments in accordance with ASC 842-10-15-40 when a portion is
attributable to the nonlease component(s).
17.3.1.5.4 Effective Date and Transition
If an entity has not yet adopted ASU 2016-02 on the date of issuance of ASU
2018-20 (i.e., December 10, 2018), the effective date of ASU 2018-20 is aligned with
that of ASU 2016-02.7
In addition, such an entity should consistently apply the amendments to all new and existing leases and apply the same transition method elected for ASU 2016-02.
17.3.1.6 TRG Activities — Billed Operating Lease Receivables
In June 2016, the FASB issued ASU 2016-13, which adds to U.S. GAAP an
impairment model — known as the CECL model — that is based on expected losses rather
than incurred losses. ASU 2016-13 significantly changes the accounting for credit
impairment under ASC 326.8 (See Deloitte’s June 17, 2016, Heads Up for more information about the guidance in ASU 2016-13.)
Upon issuing ASU 2016-13, the
FASB formed a credit losses transition resource group (TRG).9 At the TRG’s June 11, 2018, meeting,10 a stakeholder asked the FASB staff “whether billed operating lease receivables are
within the scope of the guidance in Subtopic 326-20.” The stakeholder noted that views
on this issue differ and that such views include the following:
-
“Topic 842 has specific guidance . . . indicating that if the assessment of collectibility of an operating lease changes, any amount of lease income recognized that has not been collected should be reversed through a current-period adjustment to lease income.”
-
“[T]he scope of Subtopic 326-20 includes financing receivables and billed operating lease receivables appear to meet that definition.”
In response to this inquiry, the FASB staff stated its belief that “operating
lease receivables are not within the scope of Topic 326-20” and that “it was never the
Board’s intent to include operating leases within the scope.” In November 2018, the FASB
issued ASU
2018-19 to clarify certain aspects of ASU 2016-13, including that
operating lease receivables are within the scope of ASC 842 rather than ASC 326.
Therefore, an entity would apply ASC 842 rather than ASC 326-20 to account for changes
in the collectibility assessment for operating leases. When applying ASC 842, an entity
would recognize changes in the collectibility assessment for an operating lease
receivable as an adjustment to lease income in accordance with ASC 842-10-25-13.
See additional discussion in Section 9.3.9.2.1.
17.3.1.7 ASU 2019-01 on Codification Improvements
In March 2019, the FASB issued ASU 2019-01 on Codification improvements related to the following three ASC 842 issues:
- Determination of the fair value of the underlying asset by lessors that are not manufacturers or dealers.
- Presentation in the statement of cash flows for sales-type and direct financing leases by lessors within the scope of ASC 942.
- Clarification of interim disclosure requirements during transition.
17.3.1.7.1 Determination of the Fair Value of the Underlying Asset by Lessors That Are Not Manufacturers or Dealers
ASC 840-10-55-44 provided guidance on determining fair value and applying it to
lease classification and measurement for lessors that are not manufacturers or dealers
(“qualifying lessors”), stating that:
If the lessor is not a manufacturer or dealer, the fair value of
the property at lease inception ordinarily will be its cost, reflecting any volume
or trade discounts that may apply. However, if there has been a significant lapse
of time between the acquisition of the property by the lessor and lease inception,
the determination of fair value should be made in light of market conditions
prevailing at lease inception, which may indicate that the fair value of the
property is greater or less than its cost or carrying amount, if different.
ASC 842, as originally issued, eliminated this fair value exception and instead required that the definition of fair value established in ASC 820 be applied for all aspects of lease accounting in ASC 842.
Stakeholders communicated to the FASB that not carrying forward the fair value
exception to ASC 842 would have significant adverse financial reporting consequences
for qualifying lessors in certain industries. Specifically, a lessor that is not a
manufacturer or dealer would be required to recognize (i.e., expense) acquisition
costs (e.g., sales taxes and delivery charges) at lease commencement regardless of how
long the lessor has held the asset. Consequently, a lessor whose business model
consists of financing the cost of the underlying asset to the lessee would need to
record a day 1 loss under ASC 842 in many cases. Further, to recover these costs, the
lessor would recognize interest income for sales-type and direct financing leases that
is significantly greater than that being recognized under ASC 840. Stakeholders
expressed their belief that this accounting outcome is neither useful to investors nor
representative of the business model of these lessors.
In response to this issue, the Board issued the amendment in ASU 2019-01 to provide a
fair value exception similar to that in ASC 840-10-55-44. Therefore, unless a
significant lapse of time has occurred, lessors that are not manufacturers or dealers
(generally financial institutions and captive finance companies) will continue to use
their cost, reflecting any volume or trade discounts that may apply, as the fair value
of the underlying asset.
17.3.1.7.2 Statement of Cash Flows Presentation for Sales-Type and Direct Financing Leases by Lessors Within the Scope of ASC 942
ASC 842, as originally issued, contained guidance that conflicted with industry-specific GAAP for depository and lending lessors on the presentation of principal payments received from sales-type and direct financing leases. That is, ASC 842 initially required all lessors to classify cash receipts from leases within “operating activities” in accordance with ASC 842-30-45-5, while ASC 942 provides an example in which principal payments received under leases are classified as investing activities for entities within the scope of ASC 942. (This example existed before, and was not consequentially amended by, the issuance of ASC 842.)
The Board issued the amendment in ASU 2019-01 to clarify that the existing
guidance in ASC 942 should continue to be applied after the adoption of ASC 842.
Accordingly, depository and lending lessors should continue to classify principal
payments received from sales-type and direct financing leases within “investing
activities.”
17.3.1.7.3 Clarification of Interim Disclosure Requirements During Transition
ASU 2019-01 also clarifies the transition guidance in ASC 842-10-65-1(i), noting that entities adopting ASC 842 need not provide the interim-period disclosures required by ASC 250-10-50-3, which states:
In the fiscal year in which a new accounting principle is adopted, financial information reported for interim periods after the date of adoption shall disclose the effect of the change on income from continuing operations, net income (or other appropriate captions of changes in the applicable net assets or performance indicator), and related per-share amounts, if applicable, for those post-change interim periods.
Accordingly, interim disclosures about the effect on income in the year of adoption of ASC 842 are excluded from the required disclosures in transition. The similar annual disclosures in ASC 250-10-50-1(b)(2) about the effect on income have always been excluded from the ASC 842 disclosures in transition.
17.3.1.7.4 Transition and Effective Date
There is no separate effective date and transition guidance for the Codification
improvement related to interim disclosure requirements because that amendment
represents a clarification of existing guidance. However, the effective date of the
other two amendments in ASU 2019-01 (related to the determination of fair value and
presentation in the statement of cash flows) is aligned with the effective dates of
ASU 2016-02.11
Early adoption is permitted for all entities. In accordance with ASC 842-10-65-1(c), for entities that early adopt the ASU, the amendments are effective as of the date on which the entity first applies ASU 2016-02.
17.3.1.8 ASU 2021-05 on Lessor’s Accounting for Certain Leases With Variable Lease Payments
In July 2021, the FASB issued ASU 2021-05, which requires a lessor to
classify a lease with variable lease payments that do not depend on an index or rate as
an operating lease on the lease commencement date if specified criteria are met.
Before the release of the ASU, sales-type leases or direct financing
leases with significant variable payments may have resulted in a day 1 loss on the
arrangement even if the overall economics of the arrangement were expected to be
profitable. This is because, under ASC 842, variable payments are excluded from the
definition of lease payments for both lessees and lessors. Accordingly, lessors exclude
variable payments when measuring the net investment in the lease. As a result, the
amount recognized for the net investment in the lease may be less than that derecognized
for the underlying asset. See Section 9.3.7.1.2
for more information about the accounting for such leases before the adoption of ASU
2021-05.
17.3.1.8.1 Key Provisions of ASU 2021-05
ASC 842-10-25-3A (added by ASU 2021-05) requires a lessor to classify a lease with
variable lease payments that do not depend on an index or rate as an operating lease
at lease commencement if both of the following conditions are met:
- The lease would have been classified as a sales-type lease or direct financing lease in accordance with the classification criteria in ASC 842-10-25-2 and 25-3, respectively.
- The lessor would have recognized a selling loss at lease commencement.
When applying the guidance in ASC 842-10-25-3A, the lessor would not
derecognize the underlying asset upon lease commencement but would continue to
depreciate the underlying asset over its useful life. Further, in accordance with ASC
842-30-25-11(a), the lessor would recognize fixed lease payments as “income . . . over
the lease term on a straight-line basis unless another systematic and rational basis
is more representative of the pattern in which benefit is expected to be derived from
the use of the underlying asset.” Variable lease payments would be recognized as
“income in profit or loss in the period in which the changes in facts and
circumstances on which the variable lease payments are based occur,” as indicated in
ASC 842-30-25-11(b).
Note that the ASU does not prescribe a threshold for the amount of variable payments;
the ASU’s guidance must be applied when a lease contains any amount of variable
payments (in addition to the requirement that the lessor would have otherwise
recognized a selling loss at lease commencement).
Connecting the Dots
Impacts of ASU 2021-05
We expect that, under ASU 2021-05, more lessors will be required
to classify leases as operating leases rather than as sales-type or direct
financing leases. Accordingly, additional leases will qualify for the lessor
practical expedient in ASC 842-10-15-42A, which allows lessors to combine lease
and nonlease components into a single component if certain scope requirements are
met. One of these requirements is that the underlying lease component must be
classified as an operating lease. See Section 4.3.3.2 for more information about the
lessor practical expedient.
We also expect more arrangements to qualify as a successful
purchase by the buyer-lessor in a sale-and-leaseback transaction, since the lease
from the buyer-lessor to the seller-lessee must be classified as an operating
lease for such a purchase to be successful. Accordingly, under ASU 2021-05, more
buyer-lessors will be able to obtain control of the underlying asset in the
sale-and-leaseback arrangement. However, this ASU will not affect the
seller-lessee’s accounting in a sale-and-leaseback transaction since it does not
change the lessee’s determination of lease classification. See Section 10.3 for additional guidance on evaluating
whether the transfer of an asset is a sale in a sale-and-leaseback
transaction.
17.3.1.8.2 Transition and Effective Date
Lessors that have not adopted ASC 842 on or before July 19, 2021, should apply the
transition requirements in ASC 842-10-65-1 when adopting ASU 2021-05. Those entities
should adopt the ASU on the same date on which they adopt ASC 842.
ASC 842-10
Transition Related to Accounting Standards Update No. 2021-05,
Leases (Topic 842): Lessors — Certain Leases With Variable Lease
Payments
65-5 The following
represents the transition and effective date information related to
Accounting Standards Update No. 2021-05, Leases (Topic 842): Lessors —
Certain Leases With Variable Lease Payments:
-
An entity that has not yet adopted the pending content that links to paragraph 842-10-65-1 as of July 19, 2021, shall apply the pending content that links to this paragraph when it first applies the pending content that links to paragraph 842-10-65-1 and shall apply the same transition method elected for the pending content that links to paragraph 842-10-65-1.
-
An entity within the scope of paragraph 842-10-65-1(a) that has adopted the pending content that links to paragraph 842-10-65-1 as of July 19, 2021, shall apply the pending content that links to this paragraph for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Earlier application is permitted.
-
An entity within the scope of paragraph 842-10-65-1(b) that has adopted the pending content that links to paragraph 842-10-65-1 as of July 19, 2021, shall apply the pending content that links to this paragraph for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Earlier application is permitted.
-
An entity within the scope of (b) or (c) shall apply the pending content that links to this paragraph by using one of the following two methods:
-
Retrospectively to the date in which the pending content that links to paragraph 842-10-65-1 was adopted (the beginning of the period of adoption of Topic 842). Under this transition method, the entity shall apply the pending content that links to this paragraph to leases that commence or are modified on or after the beginning of the period of its adoption of Topic 842 and do not meet the conditions in paragraph 842-10-25-8.
-
Prospectively to leases that commence or are modified on or after the date that the entity first applies the pending content that links to this paragraph and do not meet the conditions in paragraphs 842-10-25-8.
-
- An entity within the scope of (b) or (c) that elects the transition
method in (d)(1) shall provide the following transition
disclosures:
-
The applicable transition disclosures required by Topic 250 on accounting changes and error corrections, except for the requirements in paragraph 250-10-50-1(b)(2) and paragraph 250-10-50-3
-
The transition disclosures in paragraph 250-10-50-1(b)(3) as of the beginning of the earliest period presented but not before the date in which the pending content that links to paragraph 842-10-65-1 was adopted.
-
- An entity within the scope of (b) or (c) that elects the transition
method in (d)(2) shall provide the following transition
disclosures:
-
The nature of and reason for the change in accounting principle
-
The transition method
-
A qualitative description of the financial statement line items affected by the change.
-
Lessors that have adopted ASC 842 as of July 19, 2021, should apply the transition
requirements for fiscal years beginning after December 15, 2021.12 Entities should use either of the following approaches to apply the ASU’s
amendments:
- Retrospective application to leases that commence or are modified on or after the adoption of ASC 842, when the modification does not meet the conditions to be accounted for as a separate contract (as defined in ASC 842-10-25-8).
- Prospective application to leases that commence or are modified on or after the date on which a lessor first applies the amendments in ASU 2021-05, when the modification does not meet the conditions to be accounted for as a separate contract (as defined in ASC 842-10-25-8).
An entity is permitted to early adopt ASU 2021-05 as long as it does not do so before
adopting ASC 842.
Changing Lanes
Proposed ASU
The FASB initially addressed the day 1 loss issue in a proposed ASU released on October 20, 2020, that
suggested targeted improvements to the leasing guidance in ASC 842. This proposal
also discussed two additional issues that stakeholders have raised regarding the
implementation of ASC 842:
- Option to remeasure lease liability — lessee only — The purpose of this issue was to converge U.S. GAAP and IFRS accounting requirements related to remeasuring lease liabilities and the associated ROU assets when future lease payments are based on a reference index or rate. While ASC 842 precludes a lessee from remeasuring a lease liability associated with a change in lease payments as a result of changes in the reference index or rate, IFRS 16 requires a lessee to remeasure the lease liability in such circumstances. The proposed ASU would have given lessees the option of performing such remeasurement. This proposed guidance was ultimately rejected, and the project was removed from the FASB’s technical agenda.
- Modifications reducing the scope of a lease contract — The initial proposal would have amended the lease modification framework for master lease agreements or lease arrangements with multiple components. Specifically, if the scope of a lease agreement had changed (i.e., one lease component was terminated) but the remaining lease components were not economically affected, an entity would have been exempt from applying modification accounting to the remaining lease components in the lease contract. The FASB ultimately decided to remove this issue from the proposed ASU and instead added a project on lease modifications to its technical agenda. See Section 17.3.3 for further discussion of this project.
17.3.1.9 ASU 2021-09 on the Discount Rate for Lessees That Are Not PBEs
In November 2021, the FASB issued ASU 2021-09, which allows lessees that are not
PBEs to make an accounting policy election by class of underlying asset, rather than on
an entity-wide basis, to use a risk-free rate as the discount rate when measuring and
classifying leases.
In September 2020, the FASB held public roundtables to discuss lease
implementation topics. During those discussions, stakeholders expressed concerns about
the cost and complexity of applying ASC 842, specifically regarding the determination of
the discount rate used to measure a lessee’s lease liabilities and ROU assets.
Before the issuance of ASU 2021-09, ASC 842-20-30-3 permitted non-PBE
lessees to “use a risk-free discount rate for the lease, determined using a period
comparable with that of the lease term, as an accounting policy election for all
leases” (emphasis added). However, during the roundtables, the FASB learned that
many entities would not benefit from electing this practical expedient because such
entities did not want to use the risk-free rate for all of their leases for which they
are a lessee. In response, private-company stakeholders proposed a more practicable
alternative that would allow lessees to elect to use the risk-free rate as their
discount rate for certain classes of underlying assets, as opposed to only having the
option of making that election at an entity-wide level.13
17.3.1.9.1 Key Provisions of ASU 2021-09
ASU 2021-09 amends the current guidance in ASC 842-20-30-3 to allow a non-PBE lessee to
make an accounting policy election, by class of underlying assets, to use a risk-free
rate as the discount rate when the rate implicit in the lease is not readily
determinable. Specifically, ASU 2021-09 amends the guidance in ASC 842-20-30-3 to
state:
A lessee should use the rate implicit in the lease whenever that rate is
readily determinable. If the rate implicit in the lease is not readily determinable, a
lessee uses its incremental borrowing rate. A lessee that is not a public business
entity is permitted to use a risk-free discount rate for the lease instead of its
incremental borrowing rate, determined using a period comparable with that of the
lease term, as an accounting policy election made by class of underlying asset.
[Emphasis added]
In addition to allowing lessees to elect to use the risk-free rate as
an accounting policy by asset class rather than on an entity-wide level, the ASU
requires lessees to:
-
Disclose their election, including the asset class(es) for which they have elected the accounting policy.14
-
Use the rate implicit in the lease instead of the risk-free rate when the former is readily determinable, regardless of whether the practical expedient has been elected.
Connecting the Dots
Lessees Must Use Rate Implicit in the Lease if Determinable
Before ASU 2021-09, it was unclear whether non-PBE lessees that made the
entity-wide risk-free rate election were still required to use the rate implicit in
the lease when it was readily determinable. The ASU clarifies that this requirement
applies even if a lessee elected the risk-free rate for the relevant class of
underlying asset. In practice, many lessees cannot readily determine the rate
implicit in a lease since they may not know all material inputs in the lessor’s
calculation of that rate. See Section 7.2.1
for further discussion of how to evaluate whether the rate implicit in a lease is
readily determinable.
17.3.1.9.2 Transition and Effective Date
Lessees that did not adopt ASC 842 on or before November 11, 2021, should apply the
transition requirements in ASC 842-10-65-1 when adopting ASU 2021-09. The ASU should be
adopted on the same date on which an entity adopts ASC 842.
Lessees that have adopted ASC 842 as of November 11, 2021, should
apply the transition requirements below for fiscal years beginning after December 15,
2021, and interim periods within fiscal years beginning after December 15, 2022.
- An entity should apply a modified retrospective transition method to leases affected by the amendments existing as of the beginning of the year of adoption by adjusting the lease liability and corresponding ROU asset at the beginning of the fiscal year in which the ASU is adopted.15
- When adopting the ASU, an entity is not permitted to:
- Remeasure and reallocate the consideration in the contract.
- Reassess the lease term or a lessee’s election to exercise a purchase option on the underlying asset.
- Remeasure the lease payments.
- Reassess lease classification.
- The following must be disclosed as of the beginning of the year
of adoption:
- The applicable information in ASC 250-10-50-1(a) and ASC 250-10-50-1(b)(3).
- The amount of the change in the lease liability and the corresponding ROU asset resulting from the adoption of the ASU.
Early adoption of ASU 2021-09 is permitted, as long as an entity does not adopt the ASU
before adopting ASC 842.
Before the issuance of this ASU, non-PBE lessees that had adopted ASC 842 were required
to use the risk-free rate as the discount rate to measure all of their leases if they
had elected this practical expedient.16 Upon adopting the ASU, lessees that previously applied this requirement may choose
to discontinue using the risk-free rate as the discount rate for any class of underlying
asset. Conversely, lessees that did not elect to apply the risk-free rate to all their
leases upon adopting ASC 842 may now choose to apply the risk-free rate as the discount
rate for any class of underlying asset. A lessee’s policy election regarding the classes
of underlying asset to which it will apply the risk-free rate should be consistently
applied.
17.3.1.10 ASU 2023-01 on Common-Control Arrangements
In March 2023, the FASB issued ASU
2023-01, which amends certain provisions of ASC 842 that apply to
arrangements between related parties under common control. Specifically, the ASU:
- Offers private companies, as well as not-for-profit entities that are not conduit bond obligors, a practical expedient that gives them the option of using the written terms and conditions of a common-control arrangement when determining whether a lease exists and the subsequent accounting for the lease, including the lease’s classification.
- Amends the accounting for leasehold improvements in common-control arrangements for all entities.
17.3.1.10.1 Practical Expedient That Allows the Evaluation of Written Terms and Conditions of a Common-Control Arrangement
ASC 842 requires entities to determine whether a related-party arrangement between
entities under common control is a lease on the basis of the legally enforceable terms
and conditions of the arrangement. The accounting for a lease depends on the enforceable
rights and obligations of each party as a result of the contract. This principle applies
irrespective of whether such rights or obligations are included in the contract or
explicitly or implicitly provided outside of the contract (i.e., there may be
enforceable rights or obligations that extend beyond the written lease contract). See
Section 8.3.5.2 for further discussion of the
accounting for related-party leases between entities under common control.
As part of the FASB’s postimplementation review of ASC 842, private companies asserted
that this requirement creates unnecessary cost and complexity for financial statement
preparers, since the terms and conditions of such common-control lease arrangements may
lack sufficient details, may be uneconomic, or may be changed without approval, given
that one party in the common-control group generally controls the arrangement.
Therefore, stakeholders have indicated that it is challenging to determine the legally
enforceable terms and conditions of these arrangements and that legal counsel may need
to be involved in making this determination, thereby incurring additional cost.
In response to that feedback, the ASU provides an optional practical expedient under
which private companies, as well as not-for-profit entities that are not conduit bond
obligors, can use the written terms and conditions of an arrangement between entities
under common control to determine (1) whether a lease exists and (2) the subsequent
accounting for (and classification of) the lease. This practical expedient can be
applied on an arrangement-by-arrangement basis, and an entity is not required to
consider the legal enforceability of such written terms and conditions. However, if no
written terms and conditions of an arrangement between entities under common control
exist, an entity is not allowed to elect the practical expedient and is required to
apply ASC 842 in a manner consistent with how it is applied to other arrangements.
17.3.1.10.2 Accounting for Leasehold Improvements in Common-Control Arrangements
Under ASC 842, a lessee is generally required to amortize leasehold improvements that
it owns over the shorter of the useful life of those improvements or the lease term. See
Section 8.8.3 for further discussion of lessee
accounting related to leasehold improvements.
As part of the FASB’s postimplementation review of ASC 842, some stakeholders stated
that leasehold improvements associated with leases between entities under common control
are economically different from those associated with leases between entities not under
common control. In lease arrangements between entities not under common control,
leasehold improvements made by the lessee can either be for the lessee’s own benefit or
for the benefit of the lessor. However, leasehold improvements made under leases between
entities under common control are expected to benefit the parties under the
common-control arrangement. Therefore, private-company stakeholders have noted that, in
a lease arrangement between entities under common control, the amortization requirements
of ASC 842 are inconsistent with the underlying economics of the arrangement, since (1)
the lessee may continue to control the use of the underlying asset after the lease term
and (2) another party in the common-control group may benefit from the leasehold
improvements after the lessee no longer controls the use of the underlying asset.
In response to that feedback, ASU
2023-01 requires a lessee in a common-control lease arrangement to
amortize leasehold improvements that it owns over the improvements’ useful life17 to the common-control group, regardless of the lease term, if the lessee continues
to control the use of the underlying asset through a lease.
In situations in which a lessee obtains control of an underlying asset through a lease
with an unrelated party not under common control and subsequently subleases the asset to
an entity under common control, the sublessee would generally amortize the leasehold
improvements over a period that does not exceed the term of the lease between the
lessee/intermediate lessor and the unrelated party. However, if the lease between the
lessee/intermediate lessor and the unrelated party contains an option to purchase the
underlying asset and the lessee/intermediate lessor is reasonably certain to exercise
that option, the leasehold improvements should be amortized over the useful life to the
common-control group.
Further, a lessee that no longer controls the use of the underlying asset will account
for the transfer of the underlying asset as an adjustment to equity (i.e., as with a
transfer of assets between entities under common control).
This amendment applies to all entities. The FASB believes that this issue is pervasive
and that all entities are currently applying multiple methods to account for leasehold
improvements in leases between related parties under common control. For example,
according to the FASB, some entities are accounting for these leasehold improvements by
(1) amortizing them over the shorter of the lease term or the useful life of the
leasehold improvements, (2) amortizing them over the lease term to an estimated salvage
value and accounting for the unamortized balance as a transfer between entities under
common control at the end of the lease term, or (3) amortizing them over the lease term
with a portion recognized as a lease payment. Accordingly, the FASB’s objective is to
eliminate this diversity in practice by requiring both public and private entities to
apply these amendments.
17.3.1.10.3 Transition and Effective Date
ASU 2023-01 is effective for fiscal years beginning after December 15, 2023,
including interim periods within those fiscal years. Early adoption is permitted in
any annual or interim period as of the beginning of the related fiscal year.
In relation to the practical expedient offered by ASU 2023-01, entities that have not
adopted ASC 842 on or before the effective date of ASU 2023-01 must apply the
transition requirements of ASU 2016-02. Entities that have adopted ASC 842 before the
effective date of ASU 2023-01 can apply the amendments in either of the following ways:
- Prospectively to arrangements that commence or are modified on or after when the entity first applies ASU 2023-01.
- Retrospectively to the beginning period in which an entity applied ASC 842 for arrangements that existed as of the adoption date of ASU 2023-01. The practical expedient cannot be applied to common-control arrangements that no longer exist as of the adoption date.
In addition, ASC 842-10-65-7(d) states, in part, that “[a]n entity may document any
existing unwritten terms and conditions of an arrangement between entities under
common control before the date on which the entity’s first interim (if applicable) or
annual financial statements are available to be issued.”
Regarding the amendment related to accounting for leasehold improvements in
common-control arrangements, entities that have not adopted ASC 842 on or before the
effective date of ASU 2023-01 may apply the transition requirements of ASU 2016-02.
However, entities that elect to retrospectively apply ASU 2016-02 to the beginning
period of adoption are allowed to apply either of the prospective approaches described
below to avoid retrospectively accounting for leasehold improvements associated with
common-control leases.
Entities that have adopted ASC 842 before the effective date of ASU 2023-01 have the
option of using one of the following adoption methods:
- Prospective application to all new leasehold improvements recognized on or after the date on which the entity first applies the amendments in ASU 2023-01.
- Prospective application to all new and existing leasehold improvements recognized on or after the date on which the entity first applies the amendments in ASU 2023-01, with any remaining balance of leasehold improvements amortized over their remaining useful life to the common-control group determined as of that date.
- Retrospective application to the beginning of the period in which an entity first applied ASC 842; any leasehold improvements that otherwise would not have been amortized or impaired would be recognized through a cumulative-effect adjustment to opening retained earnings at the beginning of the earliest period presented in accordance with ASC 842.
17.3.2 Other FASB Activity
Since its issuance of ASU 2016-02 in February 2016, the FASB has met on numerous
occasions to discuss implementation and interpretive issues that have arisen in practice
and that various stakeholders have communicated to the Board. The table below summarizes
the topics discussed at these meetings (organized by subject matter) and provides links to
where each issue, the related guidance, or both are discussed in more detail in this
Roadmap. When a topic was discussed at several meetings, only the meeting that reflects
the final status of the topic is included. Further, the table below does not include the
topics that ultimately resulted in standard setting (e.g., land easements, transition
relief, lessor’s separation of lease and nonlease components, narrow-scope improvements
for lessors, and common control arrangements), since these are discussed elsewhere in this
Roadmap.
|
Topic or Issue
|
Summary of Board Discussion
|
Meeting Date
|
Roadmap Reference
|
|---|---|---|---|
|
Scope, Identifying a Lease, and Components of a Contract
| |||
Pipeline laterals | The Board discussed “whether a pipeline lateral is an identified asset under
Topic 842, and, if so, how an entity determines whether the customer has the
right to control the use of that pipeline lateral throughout the period of use
(that is, whether there is a lease of the pipeline lateral).” The Board agreed that, under ASC 842-10-15-16,
a pipeline lateral is an identified asset and that the
assessment of whether it is a lease must focus on
whether the customer has the right to control the
use of the identified asset in accordance with ASC
842-10-15-4. While highlighting that the specific facts
and circumstances of each arrangement must be
considered, the staff discussed two types of pipeline
laterals. | May 10, 2017 | |
|
Lease Term, Lease Payments, and Discount Rate
| |||
Determining
the term of a
head lease in a
lease/sublease
arrangement | Some have suggested that, when a sublease has
the same contractual terms as the head lease, it is
unclear how an entity determines the lease term of
the head lease. For example, some believe that if
lessee renewal options are included in a sublease,
the head lessee’s lease term (for the head lease) must
include the periods covered by those renewal options.
The Board, acknowledging that ASC 840 is silent on
this issue, does not believe that the guidance in ASC
842-10-30-1(c) should be interpreted as meaning that
all renewal options outside the lessee’s control must
be included in the term of the head lease. | November 30, 2016 | |
Testing operating leases for impairment | Stakeholders have questioned whether the interest portion of an operating lease payment should be included as a cash outflow in the determination of the undiscounted cash flows used in the asset group recoverability test. The Board generally agreed that lessees should exclude interest payments when calculating the undiscounted cash flows in the assessment of an asset group for impairment under ASC 360. However, some Board members also believe that an entity’s decision to include interest in its impairment analysis could be viewed as an accounting policy election. | November 30, 2016 | |
|
Lessor Accounting
| |||
|
Accounting for impairment of operating lease receivables
|
Stakeholders have raised questions about whether lessors
that are accounting for the impairment of operating lease receivables should
only apply the guidance in ASC 842-30, or whether they are allowed to also
apply ASC 450 to record a general allowance on a lease portfolio level.
Before adopting ASC 842, lessors would typically apply the
guidance in ASC 310, which refers to ASC 450 and requires an entity to accrue
a general allowance if certain conditions are met.
While the establishment of a general reserve under ASC
842-30 is not specifically prohibited, ASC 842-30-25-12 and 25-13 indicate
that a lessor must evaluate the collectibility of operating lease payments at
the individual lease level. If the collectibility of an individual lease is
determined not to be probable, the lessor must derecognize any receivable
previously recorded for this lease and must recognize revenue on an ongoing
basis only when cash is received. The lessor will continue to account for
revenue on a cash basis and will not establish a receivable until it is once
again probable that the operating lease payments for that lease will be
collected.
The Board observed that there is diversity in practice
related to whether an entity records a general reserve in addition to
performing the collectibility assessment on a lease-by-lease basis as
prescribed by ASC 842-30. The Board also acknowledged that when a general
reserve is applied, there is diversity in practice in the income statement
treatment of the allowance as either a reduction to revenue or bad-debt
expense.
In response to stakeholder concerns, the FASB staff cited
two methods that an entity can use to account for the impairment of operating
lease receivables:
The FASB staff agreed that under the second approach, the
income statement treatment of the general allowance (i.e., the offsetting
entry related to setting up and adjusting the allowance) could be a reduction
of revenue or a bad-debt expense.
The FASB staff determined that additional standard-setting activity related
to this issue is unnecessary at this time.
|
July 17, 2019
| |
|
Transition
| |||
Impact of prior asset group impairments of operating lease ROU asset measurement | Some stakeholders have suggested that it is unclear whether an entity would be expected to allocate prior-period asset group impairments to the operating lease ROU asset when transitioning to ASC 842. The Board stated that a lessee should not revisit prior impairment allocation conclusions and should not include any previous impairments in the measurement of an ROU asset upon adopting the guidance. | November 30, 2016 | |
Whether an
entity should
apply the
guidance in
ASC 840 or
ASC 842 during
transition | The FASB staff highlighted that it had “received several
specific transition inquiries.” Therefore, while not
answering any specific inquiry, the staff believed that it
was important to highlight the Board’s objectives in its
transition decisions in the hope that it would resolve
future questions that stakeholders may have. Two
core objectives of transition were discussed:
In addition, the discussion highlighted the following
key outcomes of the Board’s transition provisions:
The Board agreed with the staff’s analysis and did not
suggest any additional standard setting at this time. | May 10, 2017 | |
Lessor transition issue related to the allocation of contract consideration between revenue and lease components | ASC 606 requires entities to assess whether a contract is partially within the scope of ASC 606 and partially within the scope of other ASC topics (e.g., ASC 840). ASC 606 also provides guidance on how to separate the components of a contract that are within the scope of different ASC topics. Separation is based on the guidance in the other ASC topics if such guidance exists; otherwise, separation is based on the guidance in ASC 606 (i.e., it is based on the relative stand-alone selling price). As a result, the adoption of ASC 606 could affect contracts that include both revenue and lease components. The question addressed by the Board was whether the application of ASC 606 to prior periods should have an impact only on the revenue component of a contract or whether a lessor is required to reassess the accounting for the entire contract, including lease components. The accounting for the lease component could change if the transaction price is allocated on the basis of the relative stand-alone selling price and the amount allocated to the lease component is affected by the adoption of ASC 606. The Board decided that an entity is not required to reallocate contract consideration between revenue and lease components when it adopts ASC 606. In other words, application of ASC 606 should only affect the accounting for the revenue components of contracts and not the lease components. The Board indicated that it will reflect this discussion in the meeting minutes rather than requiring future standard setting. | June 21, 2017 | |
17.3.3 Ongoing FASB Activity
The FASB currently has no items related to ASC 842 on its technical
agenda. The Board had directed its staff to identify potential improvements to the lease
modification model in response to both comment-letter feedback and discussion at the
September 2020 public roundtables (see the next section for more information about the
roundtables). However, although the Board will consider such improvements at future
meetings, it decided to remove the lease modification project from its technical agenda in
June 2022. The Board will most likely consider whether targeted refinements to the lease
modification model are warranted as part of its broader postimplementation review of ASC
842.
17.3.3.1 FASB 2020 Public Roundtables
On September 18, 2020, the FASB held two public roundtables to discuss
challenges with implementing ASC 842. These roundtables were part of the FASB’s broader
ongoing effort to solicit feedback from stakeholders on difficulties with applying or
interpreting the leasing guidance. Present at the roundtables were all then-current FASB
board members, members of industry groups, preparers (from both public and private
companies), users, and representatives from accounting firms (both large firms and
private-company auditors). Representatives from the SEC and PCAOB staffs also observed
the meeting.
The table below summarizes the five topics that were identified by the
FASB staff through its outreach efforts and discussed at the roundtables. In addition to
these five topics, roundtable participants discussed (1) related-party leases, (2)
useful lives of leasehold improvements, and (3) diversity in practice related to
multiple acceptable cash flow presentation methods. On the basis of the feedback
received during the roundtable discussion, the FASB staff plans to draft proposed action
steps for each topic, which may include conducting additional outreach, issuing
educational materials or interpretive guidance, proposing standard-setting activity, or
taking no further action (i.e., the current guidance in U.S. GAAP would remain unchanged
and no additional clarification would be required). The FASB’s public comments, if any,
regarding its plans related to each of these topics are noted in the table below.
For more information about the public roundtable discussions, see Deloitte’s September
28, 2020, Heads Up.
|
FASB Agenda Topics
|
Areas of Focus
|
|---|---|
|
Lessee’s application of rate implicit in the lease
|
ASC 842-20-30-3 requires lessees to use the rate implicit
in the lease as an input in measuring the lease liability if that rate is
“readily determinable.” If that rate is not readily determinable, the
incremental borrowing rate is used. The FASB staff wanted to understand
whether the requirement for lessees to consider the implicit rate should be
eliminated from ASC 842.
Stakeholders at the roundtable discussion generally agreed
that no change to ASC 842 is required for this topic. Most large accounting
firms observed that they are not frequently receiving questions on how to
apply the phrase “readily determinable,” and preparers generally agreed that
they have not struggled with applying this phrase. However, certain
stakeholders noted that a lack of questions on this topic does not
necessarily mean that preparers would not rather use the rate implicit in
the lease. While most participants agreed that they would prefer not to
change existing GAAP, some either supported or were not opposed to an
option for lessees to determine and use the rate implicit in the
lease (such a determination would involve estimating lessor inputs), since
such an option would provide financial reporting results that are more
faithful to the economics of the underlying transaction. These individuals
argued that enhanced financial reporting in these scenarios would outweigh
the decrease in comparability that would result from introducing
optionality. In addition, stakeholders generally agreed that the rate
implicit in the lease can be readily determined when the lessee knows all
material inputs in the model (e.g., initial direct costs are
immaterial).
|
|
Lessee’s application of incremental borrowing rate
|
ASC 842 gives non-PBEs the option of using a risk-free
rate rather than an incremental borrowing rate. Given the time and effort it
takes to estimate the incremental borrowing rate, the FASB staff considered
whether ASC 842 should also give PBEs the option of using a risk-free rate
or some other specified rate.
Roundtable participants generally indicated that the
current incremental borrowing rate related requirements should not change
for public companies and that they would prefer that the FASB not release
incremental guidance or examples on this subject. Preparers indicated that,
though the cost of creating new processes for determining the incremental
borrowing rate was greater than they had initially expected, they did not
believe the postimplementation cost would be as significant because of the
investment in the processes during adoption. Financial statement users
indicated that they use the disclosure of an entity’s incremental borrowing
rate in evaluating and comparing different entities.
However, most participants were in favor of adjusting the
guidance for non-PBEs. Most supported amending ASC 842 to allow non-PBEs to
elect to use the risk-free rate on an asset-class basis rather than an
entity-wide basis. During the discussion, certain participants acknowledged
that giving non-PBEs the option of using the risk-free rate could be
arbitrary and may not have any conceptual basis. Most participants therefore
supported the Board’s consideration of whether it may be more appropriate
for non-PBEs to elect to use a different rate as an accounting policy on an
asset-class basis.
In response to these considerations, the FASB added to its
technical agenda a project on amending ASC 842 to allow non-PBEs to elect
the risk-free rate by asset class, which ultimately resulted in the issuance
of ASU 2021-09. See Section 17.3.1.9.
|
|
Embedded leases
|
Many entities have adopted capitalization thresholds for
identifying and accounting for embedded leases and do not record leases
below the established threshold. (See Section
2.2.5.2 for further discussion of considerations related to
capitalization policies.) The discussion of embedded leases at the public
roundtables focused on whether the FASB should amend ASC 842 to include a
specific quantitative or qualitative threshold for entities to use when
evaluating such leases.
Many roundtable participants were not in favor of amending
the guidance in ASC 842 on identifying embedded leases. Some participants
acknowledged that implementing a quantitative threshold would increase
convergence with IFRS Accounting Standards.17 However, many believed that such an amendment would create an
incentive for an entity to structure a contract to preclude arrangements
from being within the scope of ASC 842 even if the aggregation of
low-dollar-value leases could be material.
There was also discussion of the broader definition of a
lease and whether certain contracts that currently meet the definition are
conceptually appropriate. Specifically, participants discussed whether an
underlying asset operated by the lessor could be considered under the
lessee’s control and therefore result in the identification of a lease.
However, most participants did not support amending the U.S. GAAP definition
of a lease. See Section 3.2.2 for further discussion of
embedded leases.
|
|
Lease modifications
|
ASC 842 requires an entity to reassess whether a contract
is or contains a lease in the event of a lease modification. The standard
defines “lease modification,” in part, as a “change to the terms and
conditions of a contract that results in a change in the scope of or the
consideration for a lease.” If the modified contract is or contains a lease,
the entity analyzes whether the modification should be accounted for as a
separate contract or a continuation of the existing contract. See Section 8.6 for more information about
evaluating lease modifications.
When the modification is not accounted for as a separate
contract, a lessee is required to reassess lease classification, remeasure
its lease liability (which includes updating the discount rate as of the
effective date of the modification), and reallocate consideration in the
contract by using updated stand-alone prices as of the effective date of the
modification. Similarly, if a modification is not accounted for as a
separate contract for a lessor, a lessee will also need to reassess lease
classification and reallocate consideration in the contract.
The complexity involved in applying the modification
framework led the FASB staff to address this discussion topic at public
roundtables.
In summary, all stakeholders agreed that they would
support the Board’s moving forward with exploring how to reduce the cost and
complexity for preparers in applying the modification framework. However,
the discussion did not focus on how the framework should change to
accomplish that objective. Representatives of the large firms discussed and
generally supported a simplified model for “minor” modifications. Preparers
were also receptive to this idea but questioned how a simplified model could
be employed within their systems and processes and whether “minor” should be
a quantitative or event-based threshold.
The FASB added a project to its technical agenda to
consider whether targeted improvements to the lease modification guidance in
ASC 842 are warranted. However, the Board subsequently removed this project
from its agenda in June 2022.
|
|
Lessee allocation of fixed and variable payments
|
ASC 842 requires a lessee to identify the separate lease
and nonlease components of a contract and allocate the total consideration
provided in that contract to each of those components on the basis of their
respective stand-alone prices.18 When a lease contract has lease and nonlease components along with
variable and fixed payments, the application of the guidance can be
difficult and, some have argued, can result in accounting that potentially
does not reflect the economics of lease transactions. However, ASC 842
already provides lessees with a practical expedient related to combining
lease and nonlease components and accounting for the entire contract as a
lease, which eliminates the operational burden of allocating payments
between lease and nonlease components.
On the basis of stakeholder feedback, the FASB staff
questioned whether ASC 842 should be amended to require the allocation of
fixed and variable payments solely to a lease or nonlease component if
certain conditions are met.
Preparers that participated in the roundtable and have
already adopted ASC 842 were not in favor of U.S. GAAP changes in this area.
They noted that most had adopted the practical expedient to combine lease
and nonlease components for asset classes for which the lease components
were expected to be greater than their capitalization thresholds. These
preparers expressed concern that changes to existing guidance would be
difficult and costly to implement retrospectively and that prospective
adoption would cause comparability concerns for a significant period given
the length of many lease contracts. Public-company preparers indicated that
if the amended guidance continued to allow for the combination of lease and
nonlease components, they would continue to make that election and would not
change their current accounting methods.
Private-company preparers expressed their belief that one
of the reasons entities have elected to combine lease and nonlease
components is that the allocation guidance is very difficult to understand
and implement. They argued that if the allocation guidance for lessees were
aligned with the allocation objective in ASC 606, more entities would be
able to separate lease and nonlease components and financial reporting would
improve as a result.
Large firms generally seemed to believe that a change to
align the allocation guidance for lessees with ASC 606 was conceptually
supportable but that such a change may not be necessary because they
expected most entities to adopt the practical expedient to combine lease and
nonlease components.
|
17.3.4 FASB’s Response to the COVID-19 Pandemic
On April 8, 2020, the FASB met to discuss its ongoing efforts to monitor
and respond to the impact of COVID-19 on the preparation of financial statements under
U.S. GAAP, including the related accounting and financial reporting implications.
Specifically, the Board discussed proposals to delay the effective dates of certain
recently issued standards, including ASC 842, for certain entities. The Board later
finalized this proposed deferral for certain entities on June 3, 2020, by issuing ASU
2020-05. (See Chapter 16 for
more information.) Further, the FASB discussed and provided feedback on technical
inquiries received from stakeholders regarding certain accounting topics affected by
COVID-19, including staff guidance on how to account for rent concessions provided as a
result of the pandemic.
On April 10, 2020, the FASB issued a staff Q&A (the “Staff Q&A”) to provide guidance on its remarks
at the April 8 Board meeting about accounting for rent concessions resulting from the
COVID-19 pandemic. Specifically, the Staff Q&A affirms the discussion at the April 8
meeting by allowing entities to forgo performing the lease-by-lease legal analysis to
determine whether contractual provisions in an existing lease agreement provide
enforceable rights and obligations related to lease concessions as long as the concessions
are related to COVID-19 and the changes to the lease do not result in a substantial
increase in the rights of the lessor or the obligations of the lessee. In addition, the
Staff Q&A affirms that entities may make an election to account for eligible
concessions, regardless of their form, either by (1) applying the modification framework
for these concessions in accordance with ASC 840 or ASC 842 as applicable or (2)
accounting for the concessions as if they were made under the enforceable rights included
in the original agreement and are thus outside of the modification framework.
See Deloitte’s March 25, 2020 (updated January 11, 2021), Financial Reporting Alert for
more information on applying the FASB’s relief related to qualifying concessions as well
as interpretive responses to frequently asked questions.
Footnotes
2
See Section
17.3.2 for additional FASB activity related to the accounting for
impairment of operating lease receivables.
3
ASU 2019-10 delayed the effective date of the leasing standard
(ASU 2016-02) for all nonpublic companies. ASU 2020-05 further delayed the
effective date for all nonpublic companies, as well as for certain public NFPs.
(See further discussion in Section 16.1.) The effective date for nonpublic companies is annual
periods beginning after December 15, 2021, and interim periods within fiscal years
beginning after December 15, 2022. The effective date for public NFPs that qualify
for the deferral under ASC 842-10-65-1(a) is annual periods beginning after
December 15, 2019, and interim periods therein. The effective date for all other
public companies remained unchanged. The delayed effective date also applies to
all ASUs associated with ASU 2016-02.
4
See footnote 3.
5
See footnote 3.
6
See footnote 3.
7
See footnote 3.
8
ASC 326 includes both legacy impairment guidance moved from other
Codification sections and credit losses guidance introduced by ASU 2016-13. Some of
the guidance moved from other Codification sections was also amended by ASU
2016-13.
9
The purpose of the TRG is not to issue guidance but instead to
seek and provide feedback on potential issues related to implementation of the
credit loss standard.
10
Quoted material is from the TRG’s June 11, 2018, meeting handout.
11
See footnote 3.
12
For PBEs and entities within the scope of ASC 842-10-65-1(a),
ASU 2021-05 is effective for fiscal years beginning after December 15, 2021, and
interim periods within those fiscal years. For all other entities within the scope
of ASC 842-10-65-1(b), the ASU is effective for fiscal years beginning after
December 15, 2021, and interim periods within fiscal years beginning after
December 15, 2022.
13
ASC 842 does not address what is meant by the phrase “class of
underlying asset.” Before ASU 2021-09, entities were allowed to make other
accounting policy elections by class of underlying asset, so entities may already
have policies in place for how to define asset class. See Section 4.3.3.1 for information about applying this concept.
14
ASC 842-20-50-10, which is added by ASU 2021-09, states: “A
lessee that makes the accounting policy election in paragraph 842-20-30-3 to
use a risk-free rate as the discount rate shall disclose its election and the
class or classes of underlying assets to which the election has been
applied.”
15
The cumulative-effect adjustment to the lease liability and
corresponding ROU asset should be calculated by using the remaining lease term
and the discount rate as of the date of the adoption of ASU 2021-09. This
calculation applies to all leases existing as of the ASU’s adoption date.
16
As clarified by ASU 2021-09, the risk-free rate can only be applied for lessee
leases when the rate implicit in the lease is not readily determinable.
17
This represents a change from the proposed ASU, which stated that
leasehold improvements associated with common-control leases should be amortized
over the economic life of the leasehold improvements rather than their useful life.
The FASB made the change primarily because (1) the amortization period should be
limited to the period in which the common-control group can direct the use of the
underlying asset, (2) amortizing the leasehold improvements over the useful life to
the common-control group would be consistent with the period used by a lessee when
applying the impairment guidance in ASC 360, and (3) it could be challenging for a
lessee to determine the economic life of a leasehold improvement since it may be
required to consider factors outside the common-control group in such
circumstances.
17
Under IFRS 16, an entity may exclude leases for which
the underlying asset is of low value from its ROU assets and lease
liabilities. See paragraphs B3–B8 of IFRS 16 for information on
assessing whether an asset is of low value. Also see Appendix B for a
summary of the differences between ASC 842 and IFRS 16.
18
See Sections 4.1 and 4.2 for additional guidance on
identifying the separate lease and nonlease components, respectively.
See Section
4.4 for guidance on determining and allocating
consideration in the contract to the identified lease components.