Objective:

The objective of this project is to address the following issues related to arrangements between entities under common control:

1. Issue 1—What terms and conditions an entity should consider for:
   1. Determining whether a lease exists and, if so,
   2. The classification and accounting for that lease.
2. Issue 2—Accounting for leasehold improvements associated with leases between entities under common control.

Background:

As part of its post-implementation review efforts, the FASB continues to actively engage with stakeholders to monitor the implementation of Topic 842, Leases. This project was added to the Board’s technical agenda in response to stakeholder feedback that indicated that improvements were warranted in relation to the issues noted in the Objective Section above.

Exposure Draft(s):

On November 30, 2022, the Board issued a proposed Accounting Standards Update, Leases (Topic 842): Common Control Arrangements. The due date for comment letters was January 16, 2023.

• Download the proposed Accounting Standards Update, Leases (Topic 842): Common Control Arrangements

There are no media releases or educational materials at this time.

Decisions Reached at Last Meeting (February 15, 2023):

The Board redeliberated the proposed Accounting Standards Update, Leases (Topic 842): Common Control Arrangements, and made the following decisions.

Issue 1: Terms and Conditions to Be Considered for Applying Topic 842 to Common Control Arrangements

For arrangements between entities under common control, the Board affirmed its decision to provide entities that are not public business entities, not-for-profit bond obligors, or employee benefit plans that file or furnish financial statements with or to the U.S. Securities and Exchange Commission with a practical expedient to use written terms and conditions for:

1. Determining whether a lease exists and, if so,
2. The classification and accounting for that lease.

The practical expedient may be applied on an arrangement-by-arrangement basis. An entity applying the practical expedient is not required to determine whether those written terms and conditions are legally enforceable. If no written terms and conditions exist, an entity is required to apply Topic 842 on the basis of the legally enforceable terms of the arrangement.

Transition—Issue 1

The Board decided that an entity adopting the practical expedient concurrently with its adoption of Topic 842 is required to adopt the practical expedient using the same transition method elected to adopt Topic 842. For all other entities, the Board decided that the practical expedient may be adopted either:

1. Prospectively to all leases that commence on or after the date of adoption of the final Update
2. Retrospectively to the beginning of the earliest period presented in accordance with Topic 842 for all arrangements that exist at the date of adoption of the final Update. The amendments would not be applicable for arrangements no longer in place at the date of adoption of the final Update.

The Board affirmed its decision that an entity is permitted to document any existing unwritten terms and conditions of a common control arrangement before the date on which the entity’s first interim (if applicable) or annual financial statements are available to be issued in accordance with the practical expedient. The Board decided that an entity electing the transition practical expedients in paragraph 842-10-65-1(f) and (g) is not required to apply those transition expedients to common control arrangements for which the practical expedient for Issue 1 is being applied.

Issue 2: Accounting for Leasehold Improvements Associated with Common Control Leases

The Board decided that, for all entities, leasehold improvements associated with common control leases are required to be:

1. Amortized by the lessee over the useful life of the leasehold improvements to the common control group as long as the lessee controls the use of the underlying asset through a lease. If the lessor obtained the underlying asset through a lease with another entity not within the same common control group, the amortization period may not exceed the lease term associated with the lessor’s lease with the other entity.
2. 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.

The Board affirmed its decision that those leasehold improvements are subject to the impairment guidance in paragraph 360-10-40-4. The Board also affirmed its decision that a lessee should disclose information about leases in which the useful life of the leasehold improvements to the common control group is longer than the lease term.

Transition—Issue 2

The Board decided that an entity adopting the amendments concurrently with its adoption of Topic 842 may follow the same transition method elected to adopt Topic 842 or may use either of the prospective transition approaches listed below.

For all other entities, the Board decided that the amendments may be adopted using one of the following:

1. Prospectively to all new leasehold improvements recognized on or after the date an entity first applies the amendments.
2. Prospectively to all new and existing leasehold improvements recognized on or after the date that the entity first applies the amendments. The unamortized balance of existing leasehold improvements is required to be amortized over their remaining useful life to the common control group determined at that date.
3. Retrospectively to the beginning of the period in which the entity first applied Topic 842 for leasehold improvements that exist at the date the amendments are adopted. Any leasehold improvements that otherwise would not have been amortized or impaired are required to be recognized through a cumulative-effect adjustment to the opening balance of retained earnings at the beginning of the fiscal year of adoption of Topic 842.

The Board also decided that entities may document any previously unwritten terms and conditions of an arrangement between entities under common control before they adopt the amendments.

Effective Date

The Board decided that the amendments will be effective for all entities for fiscal years beginning after December 15, 2023, including interim periods within those fiscal periods. The Board also decided that early adoption is permitted.

Analysis of Costs and Benefits

The Board concluded that it has received sufficient information and analysis to make an informed decision on the expected costs of the amendments and that the expected benefits of those amendments would justify the expected costs.

Tentative Board Decisions Reached to Date (as of February 15, 2023):

A summary of the Board’s tentative decisions reached to date can be found here.

The Board meeting minutes, handouts, and videos are provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue a final standard.

The following are links to the minutes for each meeting.  To view Board meetings and handouts from the past 90 days, click here.
 

February 15, 2023*	Board Meeting—The Board met to discuss the feedback received from stakeholders in response to the proposed Accounting Standards Update, Leases (Topic 842); Common Control Arrangements, and to finalize its redeliberations.
September 21, 2022	Board Meeting—The Board concluded its initial deliberations on the project and directed the staff to draft a proposed Accounting Standards Update for vote by written ballot.
September 14, 2022	Board Meeting—The Board held an education session on issues raised by private company stakeholders related to the accounting for leases between entities under common control.

The Board directed the staff to draft an Accounting Standards Update for vote by written ballot. A final Accounting Standards Update is expected to be issued by the end of March 2023.

Christopher Roberge
Senior Project Manager
ceroberge@fasb.org

Michael Berryman
Practice Fellow
mberryman@fasb.org

Gia Suber
Postgraduate Technical Assistant
gsuber@fasb.org

Nathan Brown
Postgraduate Technical Assistant
nbrown@fasb.org