FASB updates leasing for entities under common control

The Financial Accounting Standards Board issued an accounting standards update Monday to enhance the guidance for applying the lease accounting standard to arrangements between entities under common control.

During FASB's post-implementation review of its leases standard, also known as Topic 842 or ASC 842 for that section of the accounting standards codification, some of its constituents relayed their concerns about how to apply the standard to related-party arrangements between entities under common control.

Last November, FASB proposed an update for private companies and most types of not-for-profit organizations (see story). During a meeting last month, it voted to approve the change (see story).

The ASU provides private companies and not-for-profit organizations that aren't conduit bond obligors with a practical expedient 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.

Courtesy of GASB

In addition, the update requires all entities (that is, including public companies) to amortize leasehold improvements associated with common control leases over the useful life to the common control group.

"I think we are reflecting the economics of the leasehold improvement, and I also think we're reflecting the economics of the lease arrangement," said FASB vice chairman Jim Kroeker during last month's meeting. "Again, we're only talking about parties under common control, so to think about inferring a longer lease that doesn't exist and report that — to me that doesn't reflect the economics. If there isn't a one-year lease, to then say, 'Let's infer that there might be an obligation, not a probable future outflow, but an actual obligation that doesn't exist,' to me isn't useful reporting. I think that comes through the related-party disclosures and the separate disclosure of the leasehold improvements."

The changes reflect some of the changes sought by accounting firms as well, but may not go far enough to satisfy all needs. "While we had expressed some concerns about the part of the proposal that requires lessees to depreciate leasehold improvements related to leases with parties that are under common control with the lessee over the useful life of the asset rather than the lease term, we are supportive overall of the FASB's dedication to providing relief where possible, especially to private companies, and we believe that this new standard will do that," said Angela Newell, deputy national managing partner of accounting at Top 10 Firm BDO USA.

"Clearly it helped, but it helped a limited group of middle-market companies," said  Kirk Rogers, a partner with Top 10 Firm RSM US in McLean, Virginia (see story). "It didn't help a conventional middle-market company that has a fleet of leased cars with Enterprise. It helped in certain unique situations, but for the vast majority of our clients who don't have those common control situations, it didn't help them. Any relief is helpful, but it still didn't dramatically change the lift that clients are having to do."