If finalized, private entities would be permitted to use any written terms and conditions between the parties, without regard to their legal enforceability, to identify, classify and account for common control leases. In addition, all lessees (public or private) would, in general, amortize leasehold improvements related to a common control lease over their ‘economic life’, regardless of the ASC 842 ‘lease term’, as long as they continue to control the use of the underlying leased asset.
Background
Under ASC 842, related-party leases (including those between parties under common control) are classified, recognized and measured based on the legally enforceable terms and conditions of the arrangement, as opposed to the economic substance of the arrangement. However, identifying the enforceable rights and obligations in an arrangement between parties under common control may be difficult because of its related-party nature.
There are presently diverse views about the extent to which entities must look for legally enforceable rights and obligations outside of any written terms and conditions, or consider the legal enforceability of any written terms (e.g. whether legal counsel must be involved or a legal opinion obtained).
Objective
To clarify (1) when private entities can look solely to written terms and conditions – i.e. without considering legal enforceability – in applying ASC 842 to arrangements between entities under common control; and (2) how lessees (public or private entities) should account for leasehold improvements related to common control leases.
Proposed amendments
Identifying terms and conditions (applicable to private entities only)
Leasehold improvements (applicable to all entities)
Transition and effective date
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