Changes to Accounting for Leases Under Common Control

On February 15, the Financial Accounting Standards Board (FASB) voted to issue an amendment to accounting rules for leases between entities under common control (related-party leases). The standard will amend Topic 842, Leases. 

Leases between related parties have proven to be complicated and time-consuming while undergoing the adoption of Topic 842, so in an effort to simplify, the FASB will finalize an Accounting Standards Update (ASU) in March. 

The first part of the ASU will allow private companies to elect a practical expedient that will permit them to utilize the written terms and conditions of a lease without having to determine if those terms and conditions are legally enforceable. Prior, many companies had concerns surrounding whether the terms were sufficient to be legally enforceable, with some having to engage legal counsel in making the determination. The ASU will allow companies to save that time and effort. Application of the practical expedient may be elected on an arrangement-by-arrangement basis, but if terms are not stated in writing, companies should still apply existing guidance under Topic 842 in determining if terms and conditions of the contract are legally enforceable. 

The second part of the ASU will apply to both private and public companies and will require that leasehold improvements related to leases between entities under common control be amortized over the useful life regardless of the lease term, as long as the lessee controls the use of the underlying asset. When the lessee ceases to control the use of the asset, the remaining value of the leasehold improvement would be accounted for as a transfer between entities under common control, and be completed through an adjustment to equity. Previously, Topic 842 required these to be amortized over the shorter of the asset’s useful life or the lease term, which presented confusion and difficulty when analyzing leases that were month-to-month or short-term in nature.

The ASU is expected to be effective for years beginning after December 15, 2023, but early adoption will be permitted. While there continue to be a number of complicated areas for the adoption of Topic 842, this change will hopefully allow some relief for companies going forward for these related-party leases.

Don’t forget, Schneider Downs offers simpLEASE, a software program that assists with the accounting requirements set forth by ASC 842. The program was developed in conjunction with the accountants at SD, is easy to use and provides accurate analysis for all lease computations. Visit simpLEASE to learn more.  

About simpLEASE

Nearly every company or organization utilizes lease contracts as part of its day-to-day operations. (ASC) 842 will dramatically alter how companies identify leases on their annual financial statements. For some organizations, this will mean analyzing hundreds – even thousands – of individual lease contacts – a time-consuming and laborious process.

simpLEASE is a software program that provides easy-to-understand guidance to analyze each individual lease. The program was developed in conjunction with the accountants at Schneider Downs, one of the nation’s 60 largest public accounting firms. Schneider Downs has been tracking and anticipating the changes to lease accounting standards for years, and has worked extensively to understand the specifics and intricacies of the standards. Thus, simpLEASE is not only easy to use, but also serves as an extremely insightful and intuitive tool to provide accurate analysis for all lease computations.

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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