The Financial Accounting Standards Board on Monday formally updated lease accounting guidance (Topic 842) of generally accepted accounting principles which provides some narrowly targeted relief related to how companies account for real estate and other types of leases between so-called common entities such as parent companies and their subsidiaries or related company divisions, according to a release.
The change will require public and private companies to “amortize leasehold improvements associated with such common control leases over the useful life to the common control group,” and provides a work-around — known as a practical expedient — allowing most private and not-for-profit companies to use written terms to more easily determine if an agreement constitutes a lease.
- The issuance of the standard, which is the final step in the standards updating process according to a FASB spokesperson, puts in place the new guidance that will be effective for fiscal years beginning after Dec. 15 of this year, although early adoption is permitted.
The formal issuance of the lease standards update comes a month after FASB voted to move forward on the matter.
The U.S. standard setter’s lease accounting guidance was last updated in 2016. Those changes, which were consequential for many companies, were then phased in over a delayed timetable due to the pandemic. But while the updated ASC 842 has been in place for some time for public companies, they have only been effective for private firms for fiscal years beginning after Dec. 15, 2021.
As such, some smaller firms are still adjusting to the new standards, which require operational leases to be disclosed on the balance sheet, both as an asset and a liability, in the same way as capital leases. Previously, operating leases were disclosed as expenses on the income statement and in the footnotes to the financials. The changes were aimed at highlighting the risks leases can pose.
Lease accounting is one of several major standards undergoing post-implementation reviews.