FASB receives feedback about potential simplifications to ASC 842
FINANCIAL REPORTING INSIGHTS |
On September 18, 2020, the Financial Accounting Standards Board (FASB) held public roundtable meetings to seek feedback about issues encountered in implementing Topic 842, Leases, of its Accounting Standards Codification (ASC), as well as potential simplifications of ASC 842 to alleviate these issues. Participants in the meetings included auditors, preparers and users of financial statements. While FASB members also took part in the meetings, they were not asked to, nor did they, make any decisions. The FASB staff is expected to work up a plan for the FASB to consider the feedback at a future meeting. The plan for a particular issue might include any number of activities, including (but not limited to) further education efforts, further outreach and (or) standard setting.
During each of the roundtable meetings, five specific issues and potential alternatives were raised by the FASB staff to solicit feedback from meeting participants. The following is a list of these issues, as well as a brief summary of the feedback provided by meeting participants:
- Lessee application of the rate implicit in the lease. While the majority of the participants preferred retaining the guidance in ASC 842 that requires a lessee to use the rate implicit in the lease if it is readily determinable, some also indicated they may be supportive of making the use of the rate implicit in the lease optional, with the default rate being the incremental borrowing rate.
- Lessee application of the incremental borrowing rate. While most of the participants strongly preferred making no changes to the incremental borrowing rate guidance in ASC 842 as it applies to public business entities (PBEs), many indicated they would not be opposed to exploring an option that would allow lessees that are not PBEs to use another specified rate instead of their incremental borrowing rate. In addition, there was broad support for allowing lessees that are not PBEs to elect the existing optional practical expedient to use the risk-free rate on an asset-class basis instead of on an all-or-nothing basis.
- Embedded leases. There was general agreement among the participants that identifying embedded leases under ASC 842 was one of the most challenging aspects of its application. However, there was not general agreement on how to address that challenge. While many participants supported not changing the guidance applicable to embedded leases, many participants were also supportive of, or not necessarily opposed to, exploring an option that would result in ASC 842 not being applied to embedded leases on the basis of a quantitative threshold. In addition, while many participants were opposed to further exploring an option that would result in ASC 842 not being applied to embedded leases on the basis of a qualitative threshold, there were some participants supportive of exploring this option.
- Lease modifications. Most, if not all, of the participants expressed an interest in simplifying the lease modification guidance in ASC 842. The suggestion that seemed to garner the most support was providing a screen or exception for minor modifications such that they would not be subject to the modification guidance. Another suggestion that seemed to be well supported was simplifying the accounting for termination penalties. Support also was expressed by some participants for the FASB’s recent decision to propose changing the lease modification guidance to alleviate some of the difficulties encountered when accounting for modifications to master lease agreements in which the only change is to reduce the number of underlying assets to be leased (see the FASB’s project update for its Leases (Topic 842): Targeted Improvements project). While the FASB’s website on the date of the meetings indicated the proposed Accounting Standards Update with this decision would be published in the third quarter of 2020, many participants indicated that the FASB should refrain from making piecemeal changes to the lease modifications guidance, and instead, consider changes on a more holistic basis.
- Lessee allocation of fixed and variable payments. While several participants expressed a preference that the guidance applicable to the allocation of fixed and variable payments to lease and nonlease components should not be changed, several participants also either preferred, or were open to, amending the guidance. The most common amendment discussed was allowing or requiring a lessee to allocate a variable payment to a single component to the extent such payment relates specifically to that component.
For additional information about the issues discussed, refer to the meeting handout. We will keep you informed to the extent the FASB proposes any changes to ASC 842 to address these or other issues.
For additional information about ASC 842 and detailed information about a lessee’s application of ASC 842, refer to our publications, Leases: Overview of ASC 842 and A guide to lessee accounting under ASC 842, respectively.