Analysts Buesser and Cannon and academic Botosan expressed concerns that staff did not reach out to public companies on that topic and thus were uncertain about the knock-on implications of the changes. In a rare turn of events, the three dissenting board members – the financial statement user voices on the board – said they did not have enough information to vote to propose changes for public companies about leasehold improvements. The issues in question surfaced during the FASB’s post-implementation review (PIR) of the standard, its process to determine whether the provisions worked as intended.īoard Split on Leasehold Improvements Issue Topic 842 requires the full magnitude of long-term lease obligations to be recorded on the balance sheet. The decisions come at a time when private companies are in the process of adopting Topic 842, and about three years after public companies adopted the standard. If no lease exists, other rules would apply.Ĭompanies will get 45 days to submit comments. Moreover, if no written terms and conditions exist an entity would apply Topic 842 to any verbal or implicit terms and conditions. Entities would not be required to determine whether those written terms and conditions are legally enforceable. The proposal would specify that entities would only consider the written terms and conditions when determining whether a lease exists and the classification and accounting for that lease, according to the discussions. A practical expedient is an accounting workaround with a simpler approach to arriving at the same answer as the initial rule. On the topic, the full board also agreed to propose a practical expedient only for private companies to simplify guidance for determining whether a lease exists for arrangements between entities under common control. Affiliated with that came issues about how to handle the treatment of leasehold improvements when there is a verbal related-party transaction because the life of the related-party lease could substantially differ from the actual life of the underlying lease asset. Problems arose for private companies because some do not have written documentation of an inter-company lease and therefore are confused about “what is legally enforceable,” according to the discussions. The decision stems from guidance in Topic 842 which requires companies to account for a lease that is under common control on the basis of the legally enforceable provisions. “These private companies under common control can simply write-down the contract terms – solves all their problems.” “We haven’t heard any problems identified by public companies so this to me is a solution in search of a problem,” Buesser, an analyst on the board, said. “And I’m particularly sensitive to this coming up, if we don’t address it, as another issue associated with private company adoption and another reason that some will think that a delay for the standard would be appropriate,” he said.ĭissenting board members, among other views, did not favor the changes for public companies, fearing it would do more harm than good. “The way I look at this project is it’s ‘do we want to narrow acceptable practice and do we want to send a clarification message to the private companies that are adopting this standard?’ recognizing the time is quickly ticking away on their adoption date,” Jones said. The proposal would amend Topic 842, Leases, to specify that leasehold improvements associated with leases between entities under common control be “amortized by the lessee over the useful life of the improvements (regardless of the lease term) as long as the lessee continues to use the underlying asset” and “accounted for as a transfer between entities under common control if, and when, the lessee ceases using the underlying asset.”Ĭhair Richard Jones, Vice Chair James Kroeker, and Board members Susan Cosper and Marsha Hunt favored the proposal Board members Gary Buesser, Fred Cannon, and Christine Botosan, dissented. Leasehold improvements are typically associated with commercial property whereby, for example, a tenant paints, upgrades lighting, adds new carpet, or makes repairs to the space. 21, 2022, voted by 4 to 3 to issue a proposal that would change the accounting rules for leasehold improvements in inter-company leases done by both public and private companies.
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