FASB to propose changes to related party leases guidance

by | Oct 6, 2022

ARTICLE | October 06, 2022

Accounting Standards Codification Topic 842 (ASC 842), Leases, which is effective this year for non-public entities with calendar-year ends, contains limited guidance on accounting for leases with related parties. ASC 842 requires entities to determine whether related party arrangements are leases based on the legally enforceable terms and conditions of the arrangement. However, certain private company stakeholders have notified the Financial Accounting Standards Board (FASB) that determining the legally enforceable terms and conditions in related party arrangements is difficult in certain circumstances, in particular for arrangements between entities under common control.

In response to this feedback, the FASB recently voted to issue a proposal that would provide entities within the scope of ASC 842-10-65-1(b) (i.e., entities that are not public business entities, not-for-profit bond obligors or employee benefit plans that file or furnish financial statements with or to the U.S. Securities and Exchange Commission) a practical expedient to use written terms and conditions for determining whether a lease exists, and if so, the classification and accounting for that lease. Among other things, the FASB has tentatively decided that an entity that applies the practical expedient would not be required to determine whether the terms and conditions are legally enforceable. If no written terms and conditions exist, an entity would be required to apply ASC 842 on the basis of the legally enforceable terms of the arrangement.

The FASB is also expected to propose that all entities with leases between entities under common control, where there are leasehold improvements associated with such a lease, should account for the leasehold improvements by:

  • Amortizing the leasehold improvement over the economic life of the improvements as long as the lessee continues to use the underlying asset
  • If and when the lessee ceases use of the underlying asset, account for any remaining leasehold improvement as a transfer between entities under common control

Lessees would also be required to disclose information about leases for which the lease term exceeds the economic life of the leasehold improvements.

The expected proposed accounting standards update (ASU) will include transition guidance that would allow implementation either:

  • Prospectively to any lease that commences on or after the date of adoption of a final ASU, or
  • Retrospectively to the beginning of the earliest period presented in accordance with ASC 842 for all arrangements that exist at the date of adoption of a final ASU.

The FASB plans to issue the proposed ASU in the fourth quarter of 2022, with a 45-day comment period.

Questions or Want to Talk?

Call us directly at 972.221.2500 (Flower Mound) or 940.591.9300 (Denton),
or complete the form below and we’ll contact you to discuss your specific situation.

This article was written by RSM US LLP and originally appeared on 2022-10-06.
2022 RSM US LLP. All rights reserved.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.



KHA Accountants, PLLC is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how KHA Accountants can assist you, please call 972.221.2500.

Business Travel Expenses: Per Diem vs Actual Expenses

If your employees travel for work purposes, it’s important to understand the various methods of tracking and substantiating travel expenses so that you can maintain accurate records, control costs, and take advantage of potential tax benefits. Watch this video to learn about business travel expenses, per diem allowances, and how they affect employees and employers.

6 Misconceptions of a Revocable Living Trust

A revocable living trust, or RLT, offers many benefits, including probate avoidance, privacy, and flexibility in managing assets during one’s life, incapacity, and death. However, despite their popularity as an estate planning tool, there are many misconceptions surrounding revocable trusts that lead to confusion and misunderstandings. Watch this video to learn about the top six misconceptions.

IRAs can be subject to Income Tax

IRAs are an important tool for many individuals when it comes to managing their long-term financial goals. IRAs are generally considered investment vehicles that are exempt from tax, but this may not always be the case.