Originally published in The Cooperative Accountant, Spring 2022 Issue
FASB AMENDS THE LEASE STANDARD TO ALLOW LESSEES THAT ARE NOT PUBLIC BUSINESSES GREATER FLEXIBILITY IN APPLYING INTEREST RATE SELECTION
On November 11, 2021, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU 2021-09) that modifies an existing provision of Topic 842 which allows non-public business entities to elect to use a risk-free rate as the discount rate for all leases. The amendments in this Update allow those lessees to make the risk-free rate election by class of underlying asset, rather than at the entity-wide level. The ASU states: “An entity that makes the risk-free rate election is required to disclose which asset classes it has elected to apply a risk-free rate. The amendments require that when the rate implicit in the lease is readily determinable for any individual lease, the lessee use that rate (rather than a risk-free rate or an incremental borrowing rate), regardless of whether it has made the risk-free rate election.”
The ASU continues: “Under the current guidance, a lessee that is not a public business entity that makes the risk-free rate election is required to use a risk-free rate for all leases. The amendments in this Update provide more flexibility for those lessees by allowing them to make the election by class of underlying asset, rather than at the entity wide level.
Stakeholders also noted that the interaction between the risk-free rate election and a lessee’s use of the rate implicit in the lease is unclear under current GAAP. The amendments in this Update require that a lessee use the rate implicit in the lease when it is readily determinable, instead of a risk-free rate or incremental borrowing rate.”
Topic 842 becomes effective for private companies for fiscal years beginning after December 15, 2021 (calendar 2022). Early adoption of Topic 842 was allowed. For those companies that have already adopted Topic 842 as of November 11, 2021, the amendments in this update are effective for fiscal years beginning after December 15, 2021 (earlier application is permitted). Entities are required to apply the amendments on a modified retrospective basis to leases that exist at the beginning of the fiscal year of adoption of a final update.
For entities that will adopt Topic 842 as of its effective date and period, the transition provisions of paragraph 842-10-65-1 should be applied. Those provisions require: “that an entity use either of the following transition methods: (1) apply the guidance to existing leases retrospectively with the cumulative-effect adjustment from transition recognized at the beginning of the earliest period presented or (2) apply the guidance to existing leases on a modified retrospective basis with the cumulative-effect adjustment from transition recognized in the opening balance of retained earnings at the beginning of the period of adoption.”
The ASU, including effective date information, is available at www.fasb.org
NEW FASB STANDARD ADDRESSES DISCLOSURES BY BUSINESS ENTITIES ABOUT GOVERNMENT ASSISTANCE
On November 17, 2021, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU 2021-10) that addresses disclosures by business entities that receive government assistance.
The ASU summary states: “The FASB is issuing this Update to increase the transparency of government assistance including the disclosure of (1) the types of assistance, (2) an entity’s accounting for the assistance, and (3) the effect of the assistance on an entity’s financial statements. Diversity currently exists in the recognition, measurement, presentation, and disclosure of government assistance received by business entities because of the lack of specific authoritative guidance in generally accepted accounting principles (GAAP). Requiring disclosures about government assistance in the notes to financial statements will provide comparable and transparent information to investors and other financial statement users to enable them to understand an entity’s financial results and prospects for future cash flows.”
The update is intended to apply to business entities that account for a transaction with a government by applying a grant contribution accounting model by analogy to other accounting guidance (for example, (a grant model with IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, or subtopic 958-605, Not-For-Profit Entities – Revenue Recognition).
In further explaining its reasoning for the need for the standard, the FASB states: “Current GAAP has no specific authoritative guidance on the accounting for, or the disclosure of, government assistance received by business entities. The amendments in this Update improve financial reporting by requiring disclosures that increase the transparency of transactions with a government accounted for by applying a grant or contribution accounting model by analogy, including (1) the types of transactions, (2) the accounting for those transactions, and (3) the effect of those transactions on an entity’s financial statements.”
The main provisions are thus: “The amendments in this Update require the following annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy:
- Information about the nature of the transactions and the related accounting policy used to account for the transactions
- The line items on the balance sheet and income statement that are affected by the transactions, and the amounts applicable to each financial statement line item
- Significant terms and conditions of the transactions, including commitments and contingencies.”
The amendments in the update are effective for all fiscal years beginning after December 15, 2021; early application is permitted. “Application should be made either (1) prospectively to all transactions within the scope of the amendments that are reflected in financial statements at the date of initial application and new transactions that are entered into after the date of initial application or (2) retrospectively to those transactions.”
The ASU, including effective date information, is available at www.fasb.org.
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