FASB improves lease guidance for related party arrangements

The FASB issued Accounting Standards Update (ASU) No. 2023-01, Leases (Topic 842): Common Control Arrangements that is intended to improve the guidance for applying Topic 842 to arrangements between entities under common control.

During the FASB’s post-implementation review (PIR) of Topic 842, certain stakeholders expressed concerns with applying Topic 842 to related party arrangements between entities under common control.

The ASU provides private companies and not-for-profit organizations that are not conduit bond obligors with a practical expedient to use the written terms and conditions of a common control arrangement to determine whether a lease exists and, if so, the classification of and accounting for that lease.

In addition, the ASU requires all entities (that is, including public companies) to amortize leasehold improvements associated with common control leases over the useful life to the common control group.

This ASU is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for both interim and annual financial statements that have not yet been made available for issuance. If an entity adopts the amendments in an interim period, it must adopt them as of the beginning of the fiscal year that includes that interim period.

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