Mar 29 Recent Updates to the New Leasing Standard (ASC 842)

The Financial Accounting Standards Board (“FASB”) recently issued an accounting standard update (“ASU”) to the new leasing standard (ASC 842) to address related party arrangements between entities under common control.  ASU 2023-01 offers private companies and nonprofits that are not conduit bond obligors a practical expedient to use the written terms and conditions of a common control arrangement to determine whether a lease exists and the subsequent accounting for the lease, including the lease’s classification.

In addition, the new ASU amends the accounting for leasehold improvements in common-control arrangements.  The new ASU is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years.  Early adoption is permitted in any annual or interim period as of the beginning of the related fiscal year.

Under ASC 842, entities were required to determine if a related party arrangement was a lease on the basis of the legally enforceable terms and conditions.  Private companies asserted that this requirement creates complexity and unnecessary cost as legal advice may be required to determine the legal enforceability.

To address this, the new ASU allows private companies and nonprofits that are not conduit bond obligors the practical expedient of not being required to consider the legal enforceability of the written terms and conditions in related party arrangements.  An entity cannot use the practical expedient for arrangements without written terms and conditions. It is required to continue applying ASC 842 as it is currently applied to other arrangements.

FASB also addressed concerns over the treatment of useful life of leasehold improvements under a common-control lease. The useful life of a leasehold improvement under ASC 842 is the shorter of the useful life of the improvement or the lease term. In response to feedback FASB received from stakeholders, under ASU 2023-01, leasehold improvements in a common-control arrangement will be amortized over the useful life to the common control group, regardless of the lease term.

If you have questions regarding the new leasing standard, please contact a member of our Real Estate Team here.