Accounting Standards Update

– March 2023

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Accounting Standards Update – March 2023

Why Is the FASB Issuing This Accounting Standards Update (Update)?

Since the issuance of Accounting Standards Update No. 2016-02, Leases (Topic 842), the Board has prioritized monitoring and assisting stakeholders with the implementation of Topic 842 through its Post-Implementation Review (PIR) process. PIR activities include, but are not limited to, responding to technical accounting inquiries and proactively seeking feedback on issues arising from applying Topic 842. The amendments in this Update respond to private company stakeholders’ concerns about applying Topic 842 to related party arrangements between entities under common control.

Who Is Affected by the Amendments in This Update?

a) Terms and Conditions to Be Considered

The practical expedient is available to entities that are not:

  • Public business entities

  • Not-for-profit conduit bond obligors

  • Employee benefit plans that file or furnish financial statements with or to
    the U.S. Securities and Exchange Commission (SEC).

b) Accounting for Leasehold Improvements

  • The amendments in this Update affect all lessees that are a party to a lease between entities under common control in which there are leasehold improvements. The amendments apply to all entities (that is, public business entities, private companies, not-for-profit entities, and employee benefit plans).

What Are the Main Provisions, How Do They Differ from Current Generally Accepted Accounting  

Principles (GAAP), and Why Are They an Improvement?

1. Terms and Conditions to Be Considered

Topic 842 requires that entities determine whether a related party arrangement between entities under common control (hereinafter referred to as a common control arrangement) is a lease. If the arrangement is determined to be a lease, an entity must classify and account for the lease on the same basis as an arrangement with an unrelated party (on the basis of legally enforceable terms and conditions).
That represents a change from the requirements of Topic 840, Leases, which required that an entity classify and account for an arrangement on the basis of economic substance when those terms and conditions were affected by the related party nature of the arrangement. Private company stakeholders observed that determining the enforceable terms and conditions of a common control arrangement to apply Topic 842 often is difficult and costly.
The amendments in this Update provide a practical expedient for private companies and not-for-profit entities that are not conduit bond obligors to use the written terms and conditions of a common control arrangement to determine:

  • Whether a lease exists and, if so,

  • The classification of and accounting for that lease.

2. Accounting for Leasehold Improvements

Topic 842 generally requires that leasehold improvements have an amortization period consistent with the shorter of the remaining lease term and the useful life of the improvements, which is an approach that is largely consistent with legacy guidance.The amendments in this Update require that leasehold improvements associated with common control leases be:

  • Amortized by the lessee over the useful life of the leasehold improvements to the common control group (regardless of the lease term) as long as the lessee controls the use of the underlying asset (the leased asset) through a lease. However, if the lessor obtained the right to control the use of the underlying asset through a lease with another entity not within the same common control group, the amortization period may not exceed the amortization period of the common control group.

  • Accounted for as a transfer between entities under common control through an adjustment to equity (or net assets for not-for-profit entities) if, and when, the lessee no longer controls the use of the underlying asset. Additionally, those leasehold improvements are subject to the impairment guidance in Topic 360, Property, Plant, and Equipment.

When Will the Amendments Be Effective?

The amendments in this Update for both Issue 1 and Issue 2 are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for both interim and annual financial statements that have not yet been made available for issuance. If an entity adopts the amendments in an interim period, it must adopt them as of the beginning of the fiscal year that includes that interim period.

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