Real Estate

New Lease Accounting Standard’s Update Issued

The Financial Accounting Standards Board (FASB) recently issued a proposed Accounting Standards Update (ASU) to improve discount rate guidance for lessees that are not public business entities—including private companies, not-for-profit organizations, and employee benefit plans.  The proposed ASU is intended to reduce the expected cost of implementing the lease standard (ASC 842) while retaining the expected benefits for users of financial statements.

Currently, ASC 842 provides the mentioned entities with a practical expedient to make an accounting policy election to use a risk-free discount rate for all leases.  There has been some reluctance to use the risk-free discount rate as it would increase an entity’s lease liabilities and right-of-use assets compared to using the incremental borrowing rate.

The proposed ASU would allow the mentioned entities to make the risk-free-rate election by class of assets instead of entity-wide.  It would also require an entity to use the implied rate in the lease agreement if its readily determinable, even if they have made the risk-free-rate accounting policy election.

While there have been delays to the start date in the past, ASC 842 will become effective for all private companies, not-for-profit organizations, and employee benefit plans for fiscal years beginning after December 15, 2021.

For any questions or issues regarding the implementation of ASC 842, please feel free to reach out to Sax’s Real Estate Practice.

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