Understanding New Accounting Rules for Common Control Leases
Last month, the Financial Accounting Standards Board (FASB) issued amendments for common control leasing arrangements. These accounting rules help clarify issues for rental agreements between businesses that have the same owner.
The update – Accounting Standards Update (ASU) No. 2023-01, Leases (Topic 842) Common Control Arrangements – clarifies how business entities controlled by the same owner determine whether a lease exists. The new guidance helps business owners approach verbal common control leases and answers questions about whether legal counsel is needed to determine the terms and conditions of a lease.
It provides an optional practical expedient (an accounting workaround) for private companies and non-profit organizations that aren’t conduit bond obligors, but this option is only applicable to written leases. The new guidance says the private company using this practical expedient must use the written terms and conditions of a common control arrangement to determine whether a lease exists and how to account for it. If the lease agreement is verbal, the company must still document the terms before applying accounting rules.
Leasehold improvements have changed
Under the new guidance, the accounting rules for leasehold improvements have also changed. These sorts of improvements – including carpet installation, painting, or building out a space – requires lessees to amortize the improvements over the improvements’ useful lives to the common control group.
Even if the lease ends, the transfer of those improvements must be accounted for through equity or net assets. (Improvements still remain subject to impairment requirements.)
Weiss professionals are here to help
These new rules will be effective for fiscal years beginning after December 15, 2023. Early adoption is allowed for interim and annual financial statements that haven’t yet been made available for issuance.
Weiss audit & assurance professionals can help you help you determine whether a common control lease exists and how to report leasehold improvements. Contact our team to learn more.
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