United States

Proposed guidance: Discount rate for lessees that are not PBEs


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 lessees that are not PBEs to determine an incremental borrowing rate. However, some private company stakeholders noted that, in the current economic environment, a risk-free rate (for example, a U.S. Treasury rate) is low compared with their expected average incremental borrowing rates, and that using the risk-free rate election could increase an entity’s lease liabilities and right-of-use assets.

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. If finalized, the proposed ASU would allow lessees that are not PBEs (private companies, not-for-profit entities and employee benefit plans) to make the risk-free rate election by class of underlying asset, rather than at the entity-wide level. An entity that makes the risk-free rate election would be required to disclose to which asset classes it has elected to apply a risk-free rate. The proposed ASU also would require that, when the rate implicit in the lease is readily determinable for any individual lease, a lessee would use that rate (rather than a risk-free rate or an incremental borrowing rate), regardless of whether it has made the risk-free rate election.

Entities that have not yet adopted ASC 842 at the date a final ASU is issued would be required to adopt the proposed amendments when they adopt ASC 842. Entities that have adopted ASC 842 as of the date a final ASU is issued would be required to adopt the proposed amendments for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Earlier application would be permitted. Entities would be required to apply the amendments on a modified retrospective basis to leases that exist at the beginning of the period of adoption of the final ASU.

The proposed ASU is available for comment until July 16, 2021.

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