FASB proposes new leases standard amendments

KPMG reports on (1) proposed ASU with targeted amendments to ASC 842 and (2) two narrow-scope projects added to the FASB’s technical agenda.

Applicability

Proposed ASU

• All companies and not-for-profit entities

Relevant dates

• July 29, 2020 – Leasing and agenda-setting decisions reached
• October 20, 2020 – Proposed ASU with ‘Targeted Improvements’ to ASC 842 issued
• December 4, 2020 – Comments due on proposed ‘Targeted Improvements’ ASU

Key impacts

On October 20, 2020 the FASB formally proposed the following targeted amendments to ASC 842:

• Permit lessees to elect to account for variable lease payments that depend on an index or rate in a manner consistent with the requirements of International Financial Reporting Standards. Under IFRS 16, a lessee is required to remeasure the lease payments, and correspondingly the lease liability and right-of-use (ROU) asset, when the adjustment to the lease payments takes effect from a change in the index or rate used to determine those payments. 
• Require a lessor to classify a lease as an operating lease if the payments for the lease are predominantly variable, regardless of whether any of the sales-type lease criteria are met. 
• Clarify that when a lease contract containing multiple lease components is modified to early terminate one or more, but not all, of the components, the company (lessee or lessor) would not apply modification accounting to the remaining lease components if the economics of those remaining leases are unchanged by the termination(s).

Unrelated to ASC 842, at its July 29 meeting the FASB decided to add the following projects to its technical agenda:

• Explore developing a principle for which benchmark interest rates are eligible for fair value hedge accounting.
• Address the effect of underwriting restrictions when measuring the fair value of equity securities.

Report contents

• Applicability 
• Key facts and impacts
• Remeasuring variable lease payments that depend on an index or rate
• Significant variable lease payments
• Modification or termination of leases within master lease agreements
• Agenda decisions unrelated to ASC 842
• Next steps

Related content

Handbook: Leases