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Leasing deferral not in the cards, but more relief for non-public entities
In the FASB’s Nov. 10 meeting, board members agreed that the FASB would not provide an additional deferral of Topic 842. On the following day, Nov. 11, 2021, the FASB issued Accounting Standards Update 2021-09 Discount Rate for Lessees That Are Not Public Business Entities (“ASU 2021-09” or the “ASU”). ASU 2021-09 amends Topic 842 Leases by providing a lessee, that is not a public business entity, more flexibility when making the accounting policy election to use an appropriate risk-free rate by allowing such election to be made by class of underlying asset. Prior to the amendments in the ASU, a lessee’s election to use a risk-free rate for lease classification and measurement was required to be applied to all leases.
On the day before ASU 2021-09 was issued, the FASB met to discuss an agenda request to consider an additional two-year deferral of Topic 842 Leases for nonpublic entities. During that meeting, the FASB board members unanimously agreed with the recommendation of the FASB staff to not add an agenda item regarding a further deferral of Topic 842. Each of the seven FASB board members articulated reasons why they did not believe a further deferral of the leases standard would be appropriate for nonpublic entities; such as:
- Their views that ample time remains for those entities to adopt the standard
- Feedback received by the FASB from nonpublic financial statement users expressing support for nonpublic entity adoption
- The amount of time that has lapsed since public entities initially adopted the standard
- The availability of practical expedients that may be elected to reduce application complexity
This ASU is another step toward reducing the complexity of applying Topic 842 by non-public entities. We believe the timing of the ASU and the remarks made by the FASB board members at the Nov. 10 meeting reduces uncertainty around the effective date of the leases standard. It appears that the FASB will stay the course, and entities that have yet to adopt Topic 842 should be prepared for adoption in calendar year 2022.
The amendments in the ASU are not a surprise as the FASB’s improvement of the election to use a risk-free discount rate was generally expected. The flexibility provided by the amendments in that ASU should provide a considerable amount of relief to lessees. However, lessees will still need to evaluate their lease portfolios to assess which, if any, classes of underlying leased assets are most suited for this election. In addition, there is an inverse relationship between discount rates and corresponding lease liabilities, which also drive right-of-use asset measurements. While this practical expedient is available to nonpublic lessees, including not-for-profit entities that are conduit bond obligors, entities should weigh the benefits of making the election against the expected financial statement impacts.
Topic 842 is effective for the annual reporting periods of non-public entities that were not otherwise required to adopt at an earlier date in fiscal years beginning after Dec. 15, 2021. For those entities, Topic 842 is effective in interim reporting periods beginning after Dec. 15, 2022.
Entities that have not yet adopted Topic 842 as of Nov. 11, 2021, may elect to use a risk-free rate by class of underlying leased asset in the same reporting period it initially adopts Topic 842. Entities that have adopted Topic 842 as of Nov. 11, 2021, may elect to use a risk-free rate by class of underlying leased asset in fiscal years beginning after Dec. 15, 2021, for annual reporting purposes and in interim periods in fiscal years beginning after Dec. 15, 2022. Earlier application of the amendments in this ASU is permitted.
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