By Denise Lugo
The FASB on July 29, 2020, voted to issue a proposal in September that amends lease accounting rules in three targeted areas companies flagged as causing negative outcomes the rules did not intend.
The proposal would amend Topic 842, Leases, for agreements dealing with: sales-type leases with substantial variable lease payments; remeasurement of lease payments based on a reference index or rate; and a master lease agreement.
Companies will get 45 days to comment.
The benefits of the changes would justify any costs companies would incur in making the changes, board members said.
Under the forthcoming proposal, sales-type leases with substantial variable payments would be classified as operating leases. This change would fix the problem – raised by the energy sector – of having to recognize a loss in profit at the start of a lease for accounts that are profitable, according to board discussions.
“I think the current accounting yields uneconomic results in this circumstance,” FASB member Susan Cosper said. “And I also think this improvement will align better with the outcome as applied under IFRS, which is also a plus.”
The proposal would also provide an option in the leases standard that permits (but does not require) lessees to remeasure lease liabilities for changes in a reference index or rate affecting future lease payments, consistent with the requirement in IFRS 16, Leases. This would eliminate costly and complex differences for financial statement preparers reporting under both GAAP and IFRS standards, the board agreed. Some board members said, however, they were concerned about the resulting lack of comparability of the change.
“I do have concern about the lack of comparability that is going to arise as a result of some entities taking the option and others not,” FASB member Christine Botosan said. “I’m really glad to hear that the staff is going to be doing some direct outreach to users because we know that we probably don’t hear too much from them through the exposure draft process itself because they often don’t respond to our requests for input on exposure drafts.”
The third change would address concerns that accounting for partial terminations of master lease agreements under the existing modification guidance in Topic 842 result in unnecessary costs and complexity, the discussions indicated. The proposal would amend Topic 842 to exempt lessees and lessors from applying the modification guidance to remaining lease components in transactions that reduce the scope of master lease agreements and do not affect the terms and conditions of the remaining lease components underlying the master lease agreement.
Topic 842 was issued in 2016 to require companies to bring the full magnitude of their long-term lease obligations on the balance sheet. It is one of the most significant new accounting standards published by the board in recent years. The board has made other narrow amendments to the standard in the past. Currently, the guidance is under post-implementation review (PIR).
The rules took effect in 2019 for public companies. In June, the standard was deferred for private companies and not-for-profits by one year to fiscal years beginning after December 15, 2021, and to interim periods within fiscal years beginning after December 15, 2022.
Two Other New Projects Added
The leases discussions were part of FASB’s broader agenda discussions on whether to add more projects to its technical agenda. Six other topics were discussed.
The board voted to add projects on the following:
- on how underwriting restrictions on the sale of equity securities should be considered when measuring fair value; and
- developing a principle for benchmark interest rates eligible for fair value hedge accounting.
Four Requests Rejected
Board members decided against adding the following to the board’s technical agenda due to – among other reasons – lack of pervasiveness of the issues raised:
- the application of fair value hedge accounting to fixed-rate call option monetization strategies;
- to address the lack of comparability regarding disclosures of the quality and quantity of customer relationships;
- to allow an entity to elect as its functional currency the parent’s reporting currency for all its foreign subsidiaries;
- to include in the glossary definition of current assets a “current portion” of fixed assets.
For in-depth analysis of the FASB’s standard for lease accounting, please see Catalyst: US GAAP — Leases , also on Checkpoint.
Additional analysis of the lease standard can be found in the Accounting and Auditing Update Service[AAUS] No. 2016-15 and SEC Accounting and Reporting Update Service[SARU] No. 2016-13 (March 2016): Special Report: Accounting for Leases—an Explanation and Analysis of Accounting Standards Update No. 2016-02.
This article originally appeared in the July 30, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.
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