Given the significant amount of effort public companies expended on adoption to the new lease standard, coupled with the significant changes to the balance sheet as a result of the adoption, the Financial Accounting Standards Board (FASB) recently hosted a meeting to discuss potential changes to the standard that might ease the compliance burden for private companies.
Overall, there seemed to be a consensus against making major changes to ASC 842, Leases; however, there were robust conversations about ways to ease the accounting for lease modifications, lessee allocation of fixed and variable payments, embedded leases and lessee use of the incremental borrowing rate (IBR). Public companies complied with the transition date to ASC 842, but many are still struggling to deal with the “Day Two” challenges of accounting for these arrangements, which was reflected in the nature of many of the topics addressed. The Roundtable conversations underpin some of the ongoing challenges facing public companies, while also highlighting the challenges private companies will face upon adoption.
A couple of the key takeaways from the Roundtable discussion are highlighted:
Accounting for lease modifications, including terminations, is a very technical topic. In the Roundtable meeting, there appeared to be general support for changes to the lease modification guidance to simplify the accounting. We have seen the FASB support this concept, as 1) earlier this year, the FASB issued a Q&A allowing companies the option of choosing not to account for lease concessions stemming from COVID-19 as a modification and 2) in mid-October, the FASB proposed an Accounting Standards Update (ASU) for three targeted improvements to the leases standard.
One of the proposed targeted improvements relates to accounting for modifications and is a proposal to ease accounting for terminations of one asset within a contract that does not materially impact the remainder of the assets accounted for in the same agreement (i.e. termination of one vehicle within a 25 lease master lease arrangement). Stakeholders are able to provide comments until December 4.
These topics received general support, especially regarding re-evaluating the lease classification upon modification since the change in the lease classification can be driven by the timing of when the lease term in the contract is modified. Companies should stay tuned to this topic as a future standard setting regarding modifications is likely.
Given the large volume of these service contracts, the process of identifying and accounting for embedded leases has proved to be a time-consuming process for many public companies. The lease asset within these service contracts has proved to be of a small-dollar in many of these arrangements, and some public companies have utilized capitalization thresholds to avoid having to identify and account for each of these arrangements.
Discussion at the Roundtable meeting addressed possible updates to easing the compliance of accounting for embedded leases, such as establishing a quantitative or qualitative threshold. However, there was general consensus that since the capitalization threshold is available under GAAP to allow an entity to only account for material transactions, private companies should utilize the capitalization threshold concept, similar to the approach that public companies have taken, rather than request the FASB to incorporate standard setting in this area. Individuals also mentioned that this might result in more accurate financial statements since the capitalization threshold is evaluated and identified as appropriate for each company, rather than set an arbitrary quantitative threshold.
Staying the Course for Compliance
The FASB Roundtable served as part of the Post-Implementation Review process for the new lease standard, ASC 842, and allowed companies, accounting firms and other relevant parties the opportunity to discuss some of the areas that were complex and time consuming on adoption. The appetite for standard setting was focused on a couple of areas. The feedback from adopters can provide private companies with insight into the complexities of transition and a roadmap to follow that will hopefully minimize the complexities of compliance.
As the economic issues related to the pandemic impact companies and finance organizations, it may be even more difficult for organizations to find the resources to devote to the lease accounting implementation. Public companies consistently advise that the process took longer to complete than expected and they wish they had started earlier. Therefore, while private companies should continue to monitor future standard setting from the Board, it is important for private companies to continue identifying and accounting for its lease inventory and avoid delays in the transition process.
Jennifer Booth is the Vice President of Accounting at LeaseQuery.
Kevin Cannon | 09/6/2022
Dan Fletcher | 08/16/2022
Sponsored by Stout | 08/15/2022
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