PROJECT UPDATE

Leases (Topic 842): Common Control Arrangements

Last updated on October 2, 2022. Please refer to the Current Technical Plan for information about the expected release dates of exposure documents and final standards.

(Sections updated on the date above are indicated with an asterisk *)

 

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):


There are no exposure documents at this time.

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

Decisions Reached at Last Meeting (September 21, 2022):


The Board decided to add a project to its technical agenda 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.
Issue 1

For arrangements between entities under common control, the Board decided to amend Topic 842, Leases, to provide entities within the scope of paragraph 842-10-65-1(b) (that is, 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) 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.
An entity applying the practical expedient would not be required to determine whether those written terms and conditions are legally enforceable. If no written terms and conditions exist, an entity would apply Topic 842 on the basis of the legally enforceable terms of an arrangement. If an entity determines that a lease does not exist, other GAAP would apply. The Board also decided that the practical expedient could be applied on an arrangement-by-arrangement basis.

Issue 2


The Board decided to amend Topic 842 for all entities with leases between entities under common control to specify that a lessee should account for associated leasehold improvements as follows:

  1. Amortize leasehold improvements over the economic life of the improvements as long as the lessee continues to use the underlying asset. If the lessor obtained the underlying asset through a lease with an entity not under common control, the economic life over which the leasehold improvements are amortized by the lessee should not exceed the lease term associated with the lessor’s lease with the entity not under common control.
  2. Account for any remaining leasehold improvements as a transfer between entities under common control if, and when, the lessee ceases using the underlying asset.
The Board decided that a lessee should disclose information about leases in which the economic life of the leasehold improvements is longer than the lease term.

Transition—Issue 1

The Board decided that entities should apply the amendments either:

  1. Prospectively to all leases that commence on or after the date of adoption of a 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 a final Update. The amendments would not be applicable for arrangements no longer in place at the date of adoption of a final Update.
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.

Transition—Issue 2

The Board decided that entities should apply the amendments using one of the following:

  1. Prospectively to all leases that commence on or after the date of adoption of a final Update.
  2. Prospectively to all leases that exist or commence on or after the date of adoption of a final Update. The unamortized balance of existing leasehold improvements would be amortized over the remaining economic life of the leasehold improvements.
  3. Retrospectively to the beginning of the earliest period presented in accordance with Topic 842 for all leases that exist at the date of adoption of a final Update. The amendments would not be applicable for arrangements no longer in place at the date of adoption of a final Update.
Effective Date

The Board decided that it would establish the effective date of final amendments after receiving comments from stakeholders on the amendments in a proposed Update. The Board also decided that the amendments should be applied for entities within the scope of paragraph 842-10-65-1(b) during interim periods within the fiscal year of adoption of a final Update. However, for entities that have not yet applied Topic 842 in interim periods, the amendments in a final Update would not be applicable during interim periods within the fiscal year of adoption of Topic 842.

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 proposed amendments and that the expected benefits of those amendments would justify the expected costs.

Tentative Board Decisions Reached to Date (as of September 21, 2022):


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.
 
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 a proposed Accounting Standards Update for vote by written ballot, with a comment period of 45 days.

Christopher Roberge
Senior Project Manager
ceroberge@fasb.org

Michael Berryman
Practice Fellow
mberryman@fasb.org

Ally Gustke
Postgraduate Technical Assistant
agustke@fasb.org

Sarah Suber
Postgraduate Technical Assistant
ssuber@fasb.org

The staff has prepared this summary for information purposes only. Any Board decisions are tentative and do not change current accounting. Official positions of the FASB are determined only after extensive due process and deliberations.
 

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