ACCOUNTING STANDARDS UPDATE 2023-01—LEASES (TOPIC 842): COMMON CONTROL ARRANGEMENTS

Overview

On March 27, 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2023-01, Leases (Topic 842): Common Control Arrangements, in response to private company stakeholder concerns about applying Topic 842 to related party arrangements between entities under common control.

First, the amendments in the Update provide a practical expedient for private entities¹ 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. A private entity may elect the practical expedient on an arrangement-by-arrangement basis and, under the practical expedient, is not required to determine whether written terms and conditions are enforceable.

Second, the amendments in this Update on leasehold improvements associated with common control leases are applicable for all entities (that is, public business entities, private companies, not-for-profit entities, and employee benefit plans) and require that those leasehold improvements be:

1. 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.
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.

Additionally, those leasehold improvements are subject to the impairment guidance in Topic 360, Property, Plant, and Equipment.

Transition and Effective Dates

The amendments in the Update are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. 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. Early adoption is permitted.

Entities adopting the practical expedient in this Update concurrently with adopting Topic 842 are required to follow the same transition requirements used to apply Topic 842.

All other entities may apply the practical expedient in this Update either:

1. Prospectively to arrangements that commence or are modified on or after the date that an entity first applies the practical expedient
2. Retrospectively to the beginning of the period in which an entity first applied Topic 842 for arrangements that exist at the date of adoption of the practical expedient. The practical expedient does not apply to common control arrangements no longer in place at the date of adoption of the amendments in this Update.

Entities adopting the leasehold improvement amendments in this Update concurrently with adopting Topic 842 may follow the same transition requirements used to apply Topic 842 or may use either of the prospective approaches described below to avoid retrospectively accounting for leasehold improvements.

All other entities are required to apply the amendments in this Update using one of the following methods:

1. Prospectively to all new leasehold improvements recognized on or after the date that an entity first applies the amendments in this Update
2. Prospectively to all new and existing leasehold improvements recognized on or after the date that an entity first applies the amendments in this Update, with any remaining unamortized balance of existing leasehold improvements 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 an entity first applied Topic 842, with any leasehold improvements that otherwise would not have been amortized or impaired recognized through a cumulative-effect adjustment to the opening balance of retained earnings (or net assets of a not-for-profit entity) at the beginning of the earliest period presented in accordance with Topic 842.

Additional Information

• Download the Accounting Standards Update
• Read the Press Release introducing the ASU

Post-Issuance Activities

None.

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¹Private Entities are entities that are not (a) public business entities, (b) not-for-profit bond obligors, and (c) employee benefits plans that file or furnish financial statements with or to the U.S. Securities and Exchange Commission.