The Financial Accounting Standards Board (FASB) recently issued its first Accounting Standards Update (ASU) of 2023, which focuses on leases, specifically common control arrangements. Under the previous standard (Topic 840), entities were required to assess common control arrangements based on their economic substance. However, under Topic 842, entities must determine whether a common control arrangement is a lease based on "legally enforceable terms and conditions," which can be oral or written.
To simplify the assessment process, ASU 2023-01 provides two practical expedients for leases under common control. The first practical expedient allows common control arrangements to be assessed based solely on written terms and conditions, which is beneficial for lessees as they will not have to obtain a legal opinion to assess whether a lease exists. However, this expedient is limited to nonpublic entities and can only be used if there are written terms available. The second practical expedient relates to leasehold improvements, is open to all entities, and requires that they be amortized by the lessee over the useful life of the leasehold improvements to the common control group, provided that the lessee controls the leasehold improvements through a lease. If the lessee no longer controls the use of the underlying asset, the improvement must be accounted for as a transfer between entities under common control.
These practical expedients will be effective for reporting periods beginning after December 15, 2023, with early adoption permitted.
It is possible that some lessors may structure their contracts to avoid recognizing lease assets and liabilities by using short-term leases (i.e., leases with a term of 12 months or less) and no written option to extend. In such cases, lessors must maintain contracts to remain eligible in their application of the practical expedient.
Overall, the new ASU is expected to simplify the assessment process for leases under common control and provide more accurate financial reporting. If you have any questions, or if you would like assistance in understanding how this may impact your organization, please do not hesitate to reach out by filling in the form below. Our team of experienced professionals can help guide you through the changes and provide support in ensuring compliance.