United States

Discount rate for lessees that are not PBEs

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Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 842, Leases, currently provides lessees that are not public business entities (PBEs) with a practical expedient that allows them to make an accounting policy election to use a risk-free rate as the discount rate for all leases. The FASB provided this practical expedient out of concern that it might be too costly for a lessee that is not a PBE to determine an incremental borrowing rate to use in discounting its lease payments. However, some private company stakeholders noted that using the risk-free rate (e.g., a U.S. Treasury rate) election could cause a significant overstatement of an entity’s lease liabilities and right-of-use assets. It also could cause leases that otherwise would be classified as operating leases to be classified as financing leases.

To address these concerns, the FASB issued a proposed Accounting Standards Update (ASU), Leases (Topic 842): Discount Rate for Lessees That Are Not Public Business Entities. On September 15, 2021, the FASB completed its redeliberations on this proposed ASU and tentatively decided to allow lessees that are not PBEs (private companies, not-for-profit entities and employee benefit plans) to make the risk-free discount rate accounting policy election by class of underlying asset, rather than at the entity-wide level. An entity that makes this election would be required to disclose its election, including the asset class to which it has made the accounting policy election. The FASB also tentatively decided to require a lessee that is not a PBE to use the rate implicit in the lease when it is readily determinable (instead of the risk-free rate), regardless of whether the lessee applies the risk-free rate election.

For a lessee that is not a PBE and has not yet adopted ASC 842 as of the issuance date of a final ASU, the transition and effective date provisions in ASC 842-10-65-1 would apply. For a lessee that is not a PBE and has adopted ASC 842 as of the issuance date a final ASU, (a) the amendments would be effective for annual reporting periods beginning after December 15, 2021, and interim reporting periods beginning after December 15, 2022, with early application permitted, and (b) the use of a modified retrospective transition method would be required.

The FASB has directed its staff to draft a final ASU for vote by written ballot.

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