Defining Issues | March 2023
Private entities are 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), in general, amortize leasehold improvements related to a common control lease over their ‘useful life’ to the common control group – regardless of the ASC 842 ‘lease term’ – as long as they continue to control the use of the underlying leased asset.
Applicability
- All private entities with common control arrangements that may contain or be leases
- All lessees (public or private) with recognized leasehold improvements related to common control leases
Relevant dates
- September 21, 2022, the FASB:
- added a project to its technical agenda on (1) applying ASC 842 to arrangements between entities under common control (Issue #1), and (2) accounting for leasehold improvements that relate to common control leases (Issue #2).
- reached tentative decisions reflected in the proposed ASU.
- November 30, 2022 – FASB issued proposed ASU.
- January 16, 2023 – Comment deadline on proposed ASU.
- February 15, 2023 – FASB affirmed the forthcoming amendments and directed the FASB staff to draft a final ASU.
- March 27, 2023 – FASB issues final ASU.
Effective dates |
Issue 1 (private entities only) |
Issue 2 (all entities) |
Annual periods – Fiscal years beginning after |
December 15, 2023 |
December 15, 2023 |
Interim periods – In fiscal years beginning after |
December 15, 2023 |
December 15, 2023 |
Early adoption allowed? |
Yes |
Yes |
Final amendments
Identifying terms and conditions (applicable to private entities only)
- A private entity can elect on an arrangement-by-arrangement basis, as a practical expedient, to use the written terms and conditions of a common control arrangement to determine whether a lease exists and, if so, the classification of and accounting for that lease.
- If there are no written terms and conditions, those entities are not permitted to use the practical expedient; instead, they evaluate whether legally enforceable terms and conditions otherwise exist and, if so, use those terms and conditions in applying ASC 842.
Leasehold improvements (applicable to all entities)
- A lessee in a common control lease amortizes related leasehold improvements that it owns for accounting purposes over their estimated useful life to the common control group – regardless of the ASC 842 lease term – as long as the lessee controls the use of the underlying (leased) asset.
- However, if the lessor is leasing the underlying asset through a lease with another entity that is not part of the same common control group, the leasehold improvements' amortization period is usually limited to the lease term associated with the underlying asset lease.
- If, before the end of the improvements’ economic life, the lessee relinquishes control over the use of the underlying asset (e.g. vacates the building and returns control over its use to the lessor), it accounts for the improvements as being transferred to the lessor, derecognizing the remaining carrying amount of the improvements with a corresponding adjustment to equity (or net assets for not-for-profit entities).
- The amendments clarify that these common control leasehold improvements are subject to the long-lived asset impairment guidance in ASC 360, with specific reference to paragraph 360-10-40-4.
- A lessee is required to disclose information about leasehold improvements associated with common control leases being amortized over a period that exceeds the ASC 842 lease term of the related leases.
Transition
- Under both amendments (terms and conditions; leasehold improvements), entities, in general, have the option to adopt the amendments (1) prospectively to new common control arrangements that commence and new leasehold improvements recognized after the entity’s adoption date of any final amendments; (2) prospectively to new common control arrangements (see #1) and new and existing leasehold improvements at the entity’s adoption date of any final amendments; or (3) retrospectively.
- For the terms and conditions amendment, entities are permitted to document any previously unwritten terms and conditions of an existing arrangement between entities under common control, and therefore use the ‘terms and conditions’ practical expedient any time before the entity’s first interim or annual financial statements applying the amendments are available to be issued.
- An entity electing the transition practical expedients in paragraphs 842-10-65-1(f) and (g) is not required to apply those transition expedients to common control arrangements for which the practical expedient for Issue 1 is being applied.
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