Insights > FASB Proposes Changes to New Lease Accounting Standard

FASB Proposes Changes to New Lease Accounting Standard

On October 20, the Financial Accounting Standards Board (FASB) issued a Targeted Improvements Exposure Draft as part of its continued post-implementation review of ASC 842, the new lease accounting standard. If approved, the guidance, which contains three proposed accounting changes, would impact the recognition of revenue and cost, better align GAAP and IFRS, and reduce cost and complexity. The FASB will determine the effective date of the amendments after considering feedback from stakeholders. The deadline for submitting stakeholder feedback is December 4.

Here’s what companies should know about the proposed changes.

The FASB will determine the effective date of the amendments after considering feedback from stakeholders. The deadline for submitting stakeholder feedback is December 4.

Operating lease classification for lessors

The current standard requires lessors to exclude variable lease payments (e.g., payments based on equipment hours or units produced) when classifying and accounting for a sales type lease. The exclusion of variable lease payments from upfront recognition may lead to an initial loss on a contract with overall positive margins. Under the proposal, lessors are required to classify leases with variable lease payments not dependent on a rate as an operating lease.

Remeasuring lease liabilities due to a change in payment escalation rate/index

The current guidance does not allow lease liabilities to be remeasured as a result of a change in rate or index (e.g., rent escalations based on Consumer Price Index) used to calculate lease payments. The proposed guidance would better align US GAAP with IFRS by allowing for lease liabilities to be remeasured for a change to the rate used for variable lease payments. Entity-wide application is required, however, if remeasurement due to a change in rate is elected.

Contract modification due to partial termination

Under the current standard, a partial termination of a lease contract triggers a lease modification for all components. The proposal provides an exemption from applying lease modification guidance to all lease components when only one or more lease components are terminated. For example, a modification of a railcar lease to reduce the number of railcars would not require application of modification guidance to the remaining railcars. This exemption can be applied only if the termination of the separate lease components does not economically impact the remaining components.

Transition requirements

Transition guidance will vary depending on whether the entity has adopted ASC 842 at the effective date of these proposed changes. If an entity has not adopted the new standard, then it will transition according to the guidance within ASC 842. If adoption has already occurred, the entity can elect to apply the changes retrospectively to the date of ASC 842 adoption or prospectively to leases that commence or are modified on or after the effective date of these proposed changes. Transition elections can be made on a per issue or topic basis.

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