Questions continue to surface to the FASB about lease accounting rules, including whether analysts and lenders find the resulting new information useful for making investment decisions, a board webcast revealed on June 12, 2023.
Investors are able to make better assessments of companies’ business operations after they have applied FASB ASC 842, Leases, although some information lack comparability, FASB member and analyst Frederick Cannon told a board webcast geared toward private companies and not-for-profit organizations.
“Overall, the financial statement users have found 842 useful. In particular, I think the balance sheet recognition has allowed for both fixed income and select equity investors to better understand the dynamics of companies and their liabilities,” Cannon stressed. “It also has enhanced the ability of many financial statement users to provide for better ratio analysis when we look at leveraged ratios,” he said. “I would also say in some cases some users have found that comparability can be challenging under the new standard, but the added information that’s available does make adjustments possible for those financial statement users.”
ASC 842 took effect in 2022 for privately held companies to require the full magnitude of long-term lease obligations to be reported on the balance sheet. The standard has been trickier than the board expected, resulting in several deferrals to the effective date and amendments to simplify certain aspects of the rules.
Cannon’s remarks were in response to a question posed by a webcast attendee that appeared to be addressing whether the FASB’s change to old leases rules is worth the accounting challenges the new rules can present. Recently, some CPAs said the standard deters privately held companies from using U.S. GAAP and some are now using tax basis to file reports. (See Fed Up with Lease Accounting Rules, Some Private Companies Turn to Tax Basis to File Statements in the April 25, 2023, edition of Accounting & Compliance Alert.)
A complementary question posed was whether FASB members “can explain the rationale behind the concept of segregating [right-of-use] assets and liabilities from other PP&E fixed assets and the related debt?” PP&E is the acronym for property, plant and equipment.
“To me the requirement for separate presentation was really all about transparency to investors and different investors will view these things in different ways and so they have the information so that if they want to combine it they can combine it, but if they don’t, if they want to calculate ratios in different ways they have the information to do so,” FASB member Susan Cosper said. “So that was one reason why we didn’t necessarily prescribe it,” she said. “But at the same time I heard similarly from some of the smaller lenders, some of the value of the information that they’re getting with respect to some of the leasing disclosures particularly.”
Also asked was whether the FASB is collecting any survey type data on how many private companies have chosen not to adopt the leases standard and thus get a qualified set of audited financial statements.
“We don’t have data on that,” Cosper explained. “From the discussions that we’ve had even at the most recent town hall it’s been about how private companies have adopted the standard,” she said. “So I don’t have a lot of data on that – would be interested in hearing if there are folks out there that have data on that and why they chose not to adopt it because we’re finding that particularly as we talk to some of the private company users, the utility that they’re finding in the information, so we don’t actually have that data.”
Issues with Land Easements?
The questions and answers (Q&A) came at the end of IN FOCUS: FASB Update for Private Companies and Not-for-Profit Organizations – a three-hour dive by FASB members and staff explaining various accounting standards.
Most of the questions surrounded lease accounting rules. Also notable was one – related to new land leases or surface use agreements from the perspective of a natural gas operator – that asked, “what are the key attributes of these land leases that trigger 842 applicability and related balance sheet on boarding?”
“I think what this one is getting at is land easements and certainly if we allowed an exception in 842, an expedient if you will, in terms of transition only for existing land easements, but to the extent that any of those easements were modified or there were new easements after the effective date you have to apply the provisions of 842 – meaning you have to determine whether you have a lease or not,” Cosper said. “And there’s actually some that would really be focusing on the right to control the use of the identified asset or land in this circumstance for a period of time in exchange for consideration,” she said. “And so you have to go through that analysis and it seems to me there is an example in Topic 350, I think it’s example 10, that helps you go through that analysis and also refers you back to the leases guidance.” She was referring to ASC 350, Intangibles – Goodwill and Other.
Among other questions, attendees asked:
- Whether a business would have to restate prior periods or would the business – just in the period of adoption – make a cumulative effect adjustment? FASB staff said that the business has a choice to go back and restate all periods presented and make its opening adjustments as of the earliest period presented in its financial statements or the choice under Accounting Standard Update (ASU) No. 2018-11, Leases (Topic 842): Targeted Improvements, to make those adjustments in the period of adoption and leave all prior periods untouched.
- [In context of when a company is adopting ASU No. 2023-01, Leases (Topic 842): Common Control Arrangements, concurrently with Topic 842.] In looking at and reassessing the amortization period for leasehold improvements for existing leases as of the adoption date, it does not result in a change to the amortization period, so is the transition method considered to be prospective applicable to new leases or prospective applicable to new and existing leases? If adopted concurrent with Topic 842 the transition methodology is that the business can use the same transition requirements of Topic 842 or the business could use some other allowed prospective methods, Cosper said.
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 June 14, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.
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