FASB is expected to amend ASC 842, Leases, with regard to common control arrangements, per their recent February 15, 2023, meeting.
Presently, ASC 842 requires entities to determine what is legally enforceable with regard to leases, even those of commonly controlled entities.
The Board will provide private entities (it’s not official yet) the ability to exercise a practical expedient to use written terms and conditions for:
- Determining whether a lease exists and, if so,
- The classification and accounting for that lease.
The practical expedient may be applied on an arrangement-by-arrangement basis. Additionally, the entity is not required to determine whether those written terms and conditions are legally enforceable.
Actions for Companies to Take
Private entities should create written terms and conditions for common control arrangements if they don’t already exist.
Why? Without them, the entity is required to apply ASC 842 based on legally enforceable terms of the arrangement. In other words, they’ll need to pay legal fees for the determination.
This is why FASB is amending ASC 842; the existing standard does not allow private entities to rely on written terms and conditions. The result is entities must spend unnecessary legal fees to determine what is legally enforceable—or spend an inordinate amount of management’s time trying to determine if terms are legally enforceable.
The existing standard is not practical for common control arrangements. This amendment, once passed by FASB, will help your company if you have such agreements.
The Financial Accounting Foundation released its free access to FASB and GASB Codifications: https://lnkd.in/ggD78_JZ
Formerly, this cost over $2,000 a year.
Please contact us if you have questions.