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Up to the Minute – Leases

Bonnie Mann Falk, Partner, Berdon LLP
Partner, Citrin Cooperman Advisors LLC / Berdon Advisors LLC

10.04.22 | Assurance Chat

It’s not too late! We still have Q4 to nail down adopting FASB Topic ASC 842, Leases. Here are our latest thoughts and current events.

How can we help?

We are excited to share – Berdon has partnered with LeaseCrunch! This product offers a fantastic tool for us, our clients, and potential clients to streamline adopting ASC 842, IFRS 16, GASB 87, and GASB 96.

LeaseCrunch is extremely user-friendly, assists in designating a lease between operating and financing, and generates monthly journal entries, amortization schedules, and quantitative footnote disclosures. We are here to help in any way we can!!! Consider using our readiness checklist – making sure you are organized, focusing on all the necessary policy elections, and not missing a thing. Check out previous Berdon communications on Topic 842 for additional background on Topic 842.

What’s the latest from the FASB?

Typically, we don’t share information about the FASB this early, but the Board is moving quickly. At the September 21, 2022, FASB Board meeting, in response to stakeholder feedback, the Board discussed leases under common control arrangements. Look out for an exposure draft soon with a 45-day comment period addressing the following two issues1:

1. What terms and conditions should an entity consider for:

    1. Determining whether a lease exists and, if so,
    2. The classification and accounting for that lease

Decisions for exposure draft:

    • Provide a practical expedient for private entities2 on an arrangement-by-arrangement basis using written terms and conditions regardless of legal enforceability.
    • In the absence of written terms and conditions, the legally enforceable terms of an arrangement would be applied.
    • If the entity determines that a lease does not exist, other GAAP applies.
    • Any previously unwritten terms and conditions between entities under common control may be documented before adopting the final ASU.
    • Transition options:
      • Prospectively for leases commencing on or after adopting the final ASU
      • Retrospectively to the earliest period presented in accordance with Topic 842 for existing leases upon adopting the final ASU.

2. Accounting for leasehold improvements associated with leases between entities under common control.

Decisions for exposure draft:

    • Leasehold improvements should be amortized over the economic life of the improvements if the lessee still uses the underlying asset.
    • If the lessor had a lease with an entity not under common control, giving them the right to use the underlying asset, then amortize over the life of the lease term with the entity, not under common control.
    • When the lessee stops using the underlying asset, record a transfer between the entities under common control.
    • Lessee to disclose lease information when the economic life of the leasehold improvements exceeds the lease term.
    • Transition options:
      • Same two choices as Issue 1, plus
      • Prospectively for lease existing or commencing on or after adopting the final ASU with existing unamortized balances amortized over the economic life of the leasehold improvements.

Q4 2022 – What should you be doing now?

Ensure that you identify your entire lease portfolio and gather lease documents. While doing so, consider any exclusions from Topic 842, including whether you are electing to expense leases with terms of less than one year, so you can put those aside. Watch out for embedded leases!

Review all terms in all lease contracts. If you don’t see a rate to use in your calculations, you do have the practical expedient of using the risk-free rate discussed in New Year, New Lease Accounting, New Update. The factors included in your calculation extend beyond lease term and payments.

Call me or your Berdon professionals to discuss the adoption of Topic 842 and/or the opportunity to use LeaseCrunch.

Let me know your thoughts about the FASB’s decisions and upcoming exposure draft. We are already thinking about how the FASB decisions will impact our attest and consulting clients.

Questions? I can be reached at 516.806.1193 | BMannFalk@BERDON.com or reach out to your Berdon advisor.

1 FASB Tentative Board Decisions, Wednesday September 21, 2022 FSB Board Meeting, https://www.fasb.org/Page/PageContent?pageId=/meetings/pastmeetings/09-21-22.html&bcpath=tff

2 Not applicable to public business entities, not-for-profit bond obligors, or employee benefit plans that file or furnish financial statements with or to the SEC)

Bonnie Mann Falk is a Partner in the Professional Practice & Quality Management Team (PPQM) at Berdon with over 30 years of experience in public accounting and expertise in various areas, including quality management, compliance, and risk management. As a PPQM Partner, Bonnie advises the Firm on policies and procedures to enhance quality, increase efficiency, and elevate communication. 

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