Private companies grapple with FASB lease accounting rules
Sept. 14, 2022
- Problems applying lease accounting standards are bubbling up for privately held firms, in part because they are more likely to operate with oral or unwritten lease agreements than their publicly-traded counterparts, according to staff and board members speaking at a Financial Accounting Standards Board (FASB) meeting Wednesday.
- The concerns are arising as the new rules have been phased in on a staggered timeline. For privately held companies they were effective for fiscal years beginning Dec. 14, 2021, and for interim periods within fiscal years beginning Dec. 15, 2022, according to a FASB spokesperson. For public companies the lease accounting standards in what is known as Topic 842 have been in effect for nearly four years.
- The board had not heard the concern until recently because public companies who began applying the standard earlier largely have written or documented lease transactions and that “solved the issue,” a FASB staff member confirmed during the meeting.
FASB is considering tweaking standards for how leases are treated in financial reports, one of three major standards currently undergoing post-implementation reviews.
The latest lease standards were aimed at accounting for and shining a spotlight on the risks and liabilities that leases can pose for companies. Under the rules, operational leases are disclosed on the balance sheet, both as an asset and a liability. Previously, operating leases were disclosed as expenses on the income statement and in the footnotes to the financials.
The potential improvements to the accounting are likely to focus on issues around leases between entities under common control, such as agreements between a parent and its subsidiaries.
Exactly what constitutes a lease is one of the questions that some companies are grappling with in relation to the rules. That’s because many privately held subsidiaries and parent companies have unwritten agreements in place that allow one of the entities to occupy a warehouse or building.
One of the proposed amendments to the standards discussed would be to treat an unwritten agreement that allows a related party to control an asset for some consideration as a one month lease. But board members expressed concern that such an approach could reduce liability disclosures.
“I have no incentive as an entity under common control with this situation to write anything down,” said Board Member Gary Buesser during the meeting. “What we’d be doing is saying, ‘you don’t have to apply 842 and you don’t have to recognize a lease liability.’”
The board could potentially revisit the issue at next week’s meeting and decide whether to move forward to fine-tune lease standards, Board Chair Richard Jones said.