In March 2023, the Financial Accounting Standards Board (FASB) released an Accounting Standards Update (ASU) on common control arrangements in leases, named ASU 2023-01, Leases (Topic 842). This update provides two significant changes for lease arrangements between related party entities under common control (i.e., common control leases). This article provides a brief overview of the standards update and how it may affect your business.
Changes to common control arrangements
This update provides two important changes and definitions to common control leases.
First, Topic 842 previously required lease identification, classification and accounting for common control leases to be evaluated based on legally enforceable terms and conditions, which is the same basis as an arrangement between unrelated parties. The new standard permits private companies and nonprofit entities that do not meet the criteria of being a public entity to apply a practical expedient (on a case-by-case basis) to solely use any written terms and conditions in common control leases to determine whether a lease exists, lease classification, and accounting for that lease. If there are no written terms and conditions, then legally enforceable terms and conditions would still require evaluation as with other leases. The FASB decided not to prescribe the form or content of a written arrangement.
Second, Topic 842 generally requires that leasehold improvements recognized by a lessee to be amortized over the shorter of the remaining lease term and the useful life of the improvements. The new standard permits any lessee under common control arrangements to amortize related leasehold improvements over the useful life to the common control group, regardless of lease term. However, impairment may still apply. Required disclosures would clarify both the remaining lease term and the remaining useful life of the related leasehold improvements. If the lessee eventually ceases to control the use of the underlying leased asset, a transfer is made between the common control entities through an adjustment to equity/ net assets.
The new ASU is effective for all entities to which these issues apply for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years.
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