Defining Issues | February 2021

 

Insight

FASB pivots on targeted improvements to ASC 842

Updated: FASB discusses feedback and redeliberates its targeted improvement proposals.

Scott Muir

Scott Muir

Partner, Dept. of Professional Practice, KPMG US

+1 212-909-5073

Richard Binderup

Richard Binderup

Senior Manager, Dept. of Professional Practice, KPMG US

+1 713-319-2832

Robin Van Voorhies

Robin Van Voorhies

Director, Dept. of Professional Practice, KPMG US

+1 617-988-5637

KPMG reports on the FASB’s February 10, 2021 redeliberations of its ASC 842 targeted improvements proposals.

Applicability

Proposed ASU

  • FASB meeting February 10, 2021 – Tentative decisions
  • 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 deadline on proposed ASU
  • February 10, 2021 – FASB redeliberates proposals 

Key impacts

At the February 10, 2021 meeting: 

  • Issue 1: The FASB asked the staff to evaluate the effects of expanding the scope of the proposal. The expanded scope would include all lessor arrangements for which excluding expected variable lease payments from the measurement of the net investment in the sales-type lease would give rise to a Day 1 loss, regardless of whether the variable payments are predominant.
  • Issue 2: The FASB decided to not proceed with the proposal and agreed to remove the issue from its technical agenda.
  • Issue 3: The FASB decided to not proceed with the proposal. Instead, the Board asked the FASB staff to consider the appropriate scope and topics for a potential wider project on the lease modification requirements under ASC 842.

October 20, 2020 proposed targeted amendments to ASC 842:

  • 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. 

  • 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. 

  • 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).

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

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