Skip to content

Fed Up with Lease Accounting Rules, Some Private Companies Turn to Tax Basis to File Statements

Denise Lugo  Editor, Accounting and Compliance Alert

· 6 minute read

Denise Lugo  Editor, Accounting and Compliance Alert

· 6 minute read

Some privately held companies are fed up and “exhausted” over adopting big new accounting standards, especially leases, and now have their sights set on using tax basis formats to file financial statements as opposed to U.S. GAAP, state CPAs said.

The FASB issued Topic 842, Leases in 2016 but it took effect on Jan. 1, 2022, for private companies that are calendar year-end filers. But many privately held companies did not look at the standard until the end of last year and some are just getting to it now.

“The implementation of ASC 842 is an enormous undertaking,” said Allison Henry, vice president of professional & technical standards at Pennsylvania Institute of Certified Professional Accountants (PICPA). “It looks so simple – frequently in training I hear ‘oh it’s just adding an asset and a liability and then you’re done, right?’ and I’ve said ‘wait no, let’s get through a good 50 minute session on this and then you can ask me the questions because it’s an enormous project management effort,’” she said on April 21, 2023.

The PICPA is the second-oldest CPA organization in the United States with more than 20,000 members, including practitioners in public accounting, industry, government, and education.

The organization found that businesses have been challenged over the past two years after COVID with Paycheck Protection Program (PPP) loan implementation coupled with resource constraints, said Henry. “We even appealed to the FASB – we wanted another year just to get to a baseline – a little bit of relief because we’ve also seen high turnover in the accounting space and so you have less people to do all of this work,” she said.

Tax-basis statements are a favorite among smaller private companies because they are able to use the same methods and principles as they do to file their federal income tax returns, according to CBIZ, a business services firm.

Generally, lenders do not favor that approach as the results differ from the GAAP, the gold standard of reporting that prevents companies from overstating profit and asset values. Some private company accountants have said that compliance with GAAP however can be costly and time consuming and more are using a special reporting framework, the most common of which is the income-tax basis format.

Leases Standard Was Deferred Several Times for Private Companies

The leases standard, a historic first for GAAP, is a substantial change that requires the full magnitude of companies’ long-term lease obligations to be recorded on the balance sheet. The standard was deferred several times for private companies.

The FASB also amended the rules in narrow areas for private companies with the issuance of simplifications under Accounting Standards Updates (ASU) No. 2021-09Leases (Topic 842): Discount Rate for Lessees That Are Not Public Business Entities, and recently ASU No. 2023-01Leases (Topic 842): Common Control Arrangements.

There were two main hurdles those amendments addressed for private companies to adopt: the incremental borrowing rate and then the accounting for related party leases, said Emily Fish, senior manager, product accounting at LeaseQuery, a CPA-built accounting software company. “Those two [amendments] really lead privates to say ‘hey we’ve really got to do this and let’s do it now,” Fish said on April 24.

Others, however, maintain that ASU No. 2023-01 which addresses related-party leases under common control still holds challenges.

“At first blush I thought that was a really great solution and it just allows them to use the written documentation, but the challenge comes in when the written document says it’s a month-to-month lease, which if it’s been effective for the past 10 years, how is this even reasonable and how do you account for it?” said Henry. “The FASB allows you to use the written document but if the document says that it’s a month-to-month lease then how do you account for that and is it really a short-term lease?—it’s still a question,” she said. “We have heard that if the entity intends to continue to renew that then it could be considered to be an evergreen lease; at that point there’s more judgment in terms of how to account for it.”

Private Company Council Needs More Rigor

The leases standard and other big ticket rules such as credit losses have sparked rumblings in the private company arena that the Private Company Council (PCC), the panel that was established in 2012 to work with the FASB to develop private company rules, is not demonstrating sufficient rigor on behalf of private companies.

In its agenda consultation outreach more than a year ago, the FASB heard from some that companies would welcome a “GAAP for Small-to-Medium Size Entities (SMEs)” standard, a package that mimics the IASB’s IFRS for SMEs standard, which offers a tailored version of IFRS standards. The California Society of CPA’s (CalCPA) Accounting Principles and Assurance Services Committee, which made the suggestion, in a letter told the board that the PCC’s efforts have not made a significant difference, as rules the panel has developed are “layered on top of the existing GAAP” and small private companies struggle to comply with them. (See U.S. Private Companies Should Get Own GAAP Like Overseas Firms, State CPA Panel Says in the Nov. 1, 2021, edition of Accounting & Compliance Alert.)

The PICPA is of a similar view.  When Topic 842 was issued, for example, although the FASB’s intension was simply to make sure that the financial statements were reflective of the assets and liabilities companies carry, that goal did not really pan out as the rules require an enormous amount of judgment, the CPA organization said.

“Imagine if you have hundreds of leases and you’re trying to manage all of these revisions constantly because you’re reassessing the lease term and you’re considering whether you’re going to renew or accommodate that lease,” said PICPA’s Henry. “For leases there are nuances that change all of the variables and to keep track of that is an enormous challenge and so you can see that it really was a very large project management challenge for many companies.”


For in-depth analysis of the FASB’s standard for lease accounting, please see Catalyst: US GAAP — Leases, also on Checkpoint.

This article originally appeared in the April 25, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.

Get all the latest tax, accounting, audit, and corporate finance news with Checkpoint Edge. Sign up for a free 7-day trial today.

More answers