FASB proposes three amendments to leases standard

Topic 842 has already taken effect for public business entities that filed financial statements with the Securities and Exchange Commission for fiscal years beginning after Dec. 15, 2018, including interim periods within those fiscal years. The effective date of the standard for private companies has been delayed multiple times, most recently (June) being pushed back to fiscal years beginning after Dec. 15, 2021, and interim periods within fiscal years beginning after Dec. 15, 2022.

The Board has sought feedback on potential implementation issues that have arisen since public business entities began implementing the leases standard. The three amendments proposed Tuesday can be commented on until Dec. 4; potential effective dates would be determined after the comment period.

“We encourage all stakeholders to review and provide feedback on the proposed ASU and whether they think the proposed changes would improve the guidance for all companies and organizations implementing it,” new FASB Chair Richard Jones said in a media advisory.

The first proposal is geared toward lessors and would amend classification requirements for leases in which payments are predominantly variable. The standard as is requires that a lessor determine whether a lease should be classified as a sales-type lease at lease commencement; stakeholders highlighted to FASB that doing so could result in unfaithful reporting outcomes given the variable payment structures of certain arrangements. FASB noted the issue particularly affected practitioners in the energy field.

Under the proposal, “Lessors would be required to classify and account for a lease with lease payments that are predominantly variable and do not depend on a reference index or a rate as an operating lease (emphasis added). When a lease is classified as operating, the lessor would not recognize a lease receivable, would not derecognize the underlying asset, and, therefore, would not recognize a selling profit or loss,” FASB said.

The second proposal is geared toward lessees and would clear up conflicts with International Financial Reporting Standard 16 on leases. As is, Topic 842 prohibits remeasuring lease liability solely for a change in a reference index or a rate upon which some or all of the variable lease payments are based. Adjustments to future payments resulting from such a change are accounted for as variable lease costs and recognized in the period in which the obligation for those payments is incurred.

IFRS 16 “requires a lessee to remeasure the lease liability in subsequent periods when a change to the lease payments resulting from a change in a reference index or a rate takes effect.” The differences in reporting has resulted in increased costs for stakeholders complying with both standards.

The amendment would provide lessees with the option to make an entity-wide accounting policy election to remeasure lease liabilities for changes in a reference index or a rate affecting future lease payments at the date that those changes take effect. For entities that need not exercise the option, a determination can be based on what is most cost-effective.

The third proposal would affect both lessors and lessees with regard to lease contract modifications. The amendment “would change the requirements when there is an early termination of some leases within a contract that does not economically affect the remaining leases in that contract,” FASB stated, noting that stakeholders questioned the appropriateness of the standard as is and expressed concerns about unjustified costs and complexity.

If the amendments are approved, early adoption will be accepted.