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FASB takes step toward clarifying lease accounting

Dec. 1, 2022

The proposed lease accounting update comes as the FASB works on a project that would require companies to disclose more income-tax information.

The Financial Accounting Standards Board (FASB) is moving to take another crack at a relatively narrow piece of its existing lease accounting guidance — issuing a proposed update to standards this week and seeking comments from stakeholders by Jan. 16.

The U.S. standard setter is poised to clarify how companies should treat real estate and other lease agreements between common entities such as related company divisions or parents and subsidiaries.

Under the FASB’s proposed update, private companies and certain not-for-profit organizations would determine whether a lease existed and its treatment based on written terms and conditions for the arrangement, according to a Wednesday FASB press release. In addition, the update proposed to change how leasehold improvements are accounted for, according to the release.

Accounting for leases can be tricky for private firms because the arrangements are not always documented. The ambiguity has come to the fore this year as non-public companies seek to comply with the new standards, according to Patrick Farrelly, a partner with UHY LLP, a New York City-based accounting and advisory firm. Questions from the private firms helped spark the move for an update, he said.

“A lot of the noise is...most private companies don’t really do quarterly reporting and they really do their financial statements at the end of the year so basically they’re coming to the end of the year and realizing they need to implement this standard and now that they are you’re seeing some of these issues arise,” Farrelly said.

The FASB’s lease accounting standards were last updated in 2016. They were then phased in over a delayed timetable due to the pandemic, with private companies now facing their first full year under the new guidance. While the updated ASC 842 has been in place for some time for public companies, they have only been effective for private firms for fiscal years beginning after Dec. 15, 2021.

Under the current accounting rules that some companies are still adjusting to, operational leases are disclosed on the balance sheet, both as an asset and a liability, in the same way as capital leases. Previously, operating leases were disclosed as expenses on the income statement and in the footnotes to the financials. The changes were aimed at highlighting the risks leases can pose.

Lease accounting is one of three major standards currently undergoing post-implementation reviews.

There’s often some initial pain in the early stages of adopting new standards and companies appreciate updates that smooth out wrinkles that emerge in implementation, Farrelly said. “You’re going to keep finding nuances,” he said. “It’s never easy to adopt any new accounting standard.”

The FASB has a full agenda. On Wednesday it moved forward with a project that is poised to require companies to disclose more income-tax information in their financial reports and it is also tackling accounting for cryptocurrencies. In October the board reached a tentative decision to make fair value the primary accounting method for measuring crypto assets.

[CFO Dive]

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