Now that private companies are implementing ASC 842 Leases, the updated lease accounting standard, many are finding that the guidance is not clear-cut.
One area of confusion has been the requirement to classify and account for related-party leases on the basis of “legally enforceable” terms and conditions. Arrangements with related parties are common in the construction industry but don’t always come with written documentation, making this determination difficult.
In response to this challenge, the Financial Accounting Standards Board (FASB) issued a proposal that amends ASC 842 and offers the following simplified guidance for determining when a lease exists between related parties:
- Entities will only consider the written terms and conditions and not be required to determine if they are legally enforceable.
- In the absence of written terms and conditions, ASC 842 should be applied to any verbal or implicit terms and conditions.
- If no legally enforceable terms (written, verbal or implicit) exist, the arrangement is not a lease, and other GAAP rules would apply.
The proposal also amends ASC 842 in the way lessees should treat leasehold improvements for related-party leases. As long as the underlying asset continues to be used by the lessee, the improvement should be amortized over its useful life (regardless of lease term). When the lessee stops using the asset, the improvement should be accounted for as a transfer between entities under common control.
Generally, these amendments would apply to all non-public entities once an effective date is announced.
We’re here to help you get ASC 842 right.
We know related-party leases are just one of many complexities in the adoption of the new lease accounting standard. Our Construction team is here to help you get it right the first time. Reach out to your Grassi advisor or Carl Oliveri, Construction Practice Leader, to learn more.