The FASB has issued an Exposure Draft, Leases (Topic 842): Common Control Arrangements. This Exposure Draft is an outcome of concerns expressed by private company stakeholders about the application of ASC 842 for common control arrangements identified during the FASB’s post-implementation review process.

Topic 842 currently requires related party arrangements between entities under common control to account for the lease similarly to unrelated parties. This includes analyzing the legally enforceable terms and conditions of the leasing arrangement, which can be difficult with common control leasing arrangements. To determine the legally enforceable terms, some private companies felt they would need to seek legal counsel to determine the terms and conditions even when the lease is in writing.

Additionally, under Topic 842, leasehold improvements are required to be amortized over the shorter of the remaining lease term or the useful life of the leasehold improvements. Private company stakeholders noted that amortizing leasehold improvements associated with common control leases over a shorter period than the economic life of the leasehold improvements may result in financial reporting that does not faithfully represent the economics of those arrangements. The current guidance also does not address the recognition of the transfer of value between common control entities when the lessee no longer controls the underlying asset. These issues result in diversity in practice.

The Exposure Draft would allow for private companies and not-for-profit entities that are not conduit bond obligors with common control leasing arrangements to elect a practical expedient in which the following are allowed:

1. The written terms and conditions of the common control leasing arrangement could be used to determine whether a lease exists and the classification of that lease. 
2. Leasehold improvements obtained in connection with common control leasing arrangements would be amortized over the economic life of the leasehold improvements, regardless of the lease term as long as the lessee controls the underlying asset.
3. Transfers between common control entities for underlying assets that are no longer being controlled by the lessee could be transferred to the common control entity through an adjustment to equity.

The practical expedient can be elected on an arrangement by arrangement basis and is only applicable to leases that are in writing. Any leases that are not in writing should continue to analyze the legally enforceable terms and conditions. The entity would be permitted to document any existing unwritten terms and conditions of the arrangements between common control entities before the financial statements are available to be issued.

For entities that have not yet adopted ASC 842, the same transition requirements elected would be used for this practical expedient election.  For entities that have adopted ASC 842, the Exposure Draft would allow either prospective application or retrospective application at the date that ASC 842 was implemented for arrangements existing at the date of adoption.  

For the application of accounting for leasehold improvements, the entity can elect to apply i) prospectively to all new leasehold improvements, ii) prospectively to all new and existing leasehold improvements with any remaining unamortized leasehold improvement balances amortized over the remaining economic life, or iii) retrospectively to the adoption date of ASC 842 with a cumulative-effect adjustment to the opening balance of retained earnings.

FASB has asked stakeholders to provide their comments on specific questions by the end of the comment period ends, which ends on January 16, 2023. The effective date will be determined after FASB considers the feedback received.

The full text of the Exposure Draft can be found here.

 

^{Readers should not act upon information presented without individual professional consultation.}