The Financial Accounting Standards Board (FASB) on Thursday issued an update to its leases standard regarding discount rate guidance for lessees that are not public business entities.
Accounting Standards Codification Topic 842 permits lessees that are not public business entities to make an accounting policy election to use a risk-free rate as the discount rate for all leases. Under the update, the election of the risk-free rate can be made by class of underlying asset, rather than at the entity-wide level, and the election (including asset class) must be disclosed.
Lessees using the election are required to use the rate implicit in the lease when it is readily determinable, instead of the risk-free rate.
The update is designed to reduce the cost of implementing Topic 842 for private companies, not-for-profit organizations, and employee benefit plans. It comes the same week FASB voted against a third delay to its leases standard, which is set to take effect for nonpublic entities fiscal years beginning after Dec. 15, 2021, and interim periods within fiscal years beginning after Dec. 15, 2022.
Entities that have not yet adopted Topic 842 as of Thursday are required to account for the new update in their adoption. For those organizations that adopted the standard early, the effective date of the new update is in line with the standard’s deadline of fiscal years beginning after Dec. 15, 2021, and interim periods within fiscal years beginning after Dec. 15, 2022.