At a September 2022 meeting, the FASB added a new project to its technical agenda and reached tentative decisions about how (1) private entities should apply ASC 842 to common control lease arrangements; and (2) all entities should account for leasehold improvements in common control leases. We summarize the Board’s tentative decisions and what lies ahead below.
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).
To clarify (1) whether, and if so when, private entities must look beyond the legally enforceable rights and obligations when 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.
The following reflects the Board’s tentative decisions to date. As a next step, the FASB staff will draft a proposed ASU for Board vote by written ballot. If approved, the proposed ASU will be exposed for a 45-day public comment period.
Identifying terms and conditions (applicable to private entities only)
Leasehold improvements (applicable to all entities)
Transition and effective date