FASB Issues Guidance On How to Account for Related Party Leases

There’s new guidance for businesses and nonprofits that are subject to the relatively new lease accounting standard.

In late March 2023, the Financial Accounting Standards Board (FASB) issued guidance for applying Accounting Standards Codification (ASC) 842, Leases, to lease arrangements between entities under common control.

To recap, the lease standard impacts any business or nonprofit with GAAP financial statements. Let’s look at the two main issues the new guidance — Accounting Standards Update (ASU) No. 2023-01, Leases (Topic 842) Common Control Arrangements — covers.

Issue 1: Determining Whether a Lease Exists

The amendments in this update provide a practical expedient for private companies and nonprofit entities to use the written terms and conditions of a common control arrangement, without regard to their legal enforceability, to determine:

1. Whether a lease exists and, if so,
   
   

2. The classification of and accounting for that lease.

The practical expedient may be applied on an arrangement-by-arrangement basis. If no written terms and conditions exist, an entity is prohibited from applying the practical expedient.

Issue 2: Leasehold Improvements Associated With Common Control Leases

The amendments in this update require that leasehold improvements associated with common control leases be:

1. Amortized by the lessee over the useful life of the leasehold improvements to the common control group (regardless of the lease term) as long as the lessee controls the use of the underlying asset (the leased asset) through a lease. However, if the lessor obtained the right to control the use of the underlying asset through a lease with another entity not within the same common control group, the amortization period may not exceed the amortization period of the common control group.
   
   

2. Accounted for as a transfer between entities under common control through an adjustment to equity (or net assets for nonprofit entities) if, and when, the lessee no longer controls the use of the underlying asset.

Additionally, leasehold improvements are subject to the impairment guidance in Topic 360, Property, Plant, and Equipment.

When Does the New Guidance Take Effect?

Both amendments are effective for years beginning after December 15, 2023, but early adoption is permitted.

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