INSIGHTS AND RESOURCES
Proposed guidance: Discount rate for lessees that are not PBEs
FINANCIAL REPORTING INSIGHTS |
Authored by RSM US LLP
Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 842, Leases, currently provides lessees that are not public business entities (PBEs) with a practical expedient that allows them to make an accounting policy election to use a risk-free rate as the discount rate for all leases. The FASB provided this practical expedient out of concern that it might be too costly for lessees that are not PBEs to determine an incremental borrowing rate. However, some private company stakeholders noted that, in the current economic environment, a risk-free rate (for example, a U.S. Treasury rate) is low compared with their expected average incremental borrowing rates, and that using the risk-free rate election could increase an entity’s lease liabilities and right-of-use assets.
To address these concerns, the FASB issued a proposed Accounting Standards Update (ASU), Leases (Topic 842): Discount Rate for Lessees That Are Not Public Business Entities. If finalized, the proposed ASU would allow lessees that are not PBEs (private companies, not-for-profit entities and employee benefit plans) to make the risk-free rate election by class of underlying asset, rather than at the entity-wide level. An entity that makes the risk-free rate election would be required to disclose to which asset classes it has elected to apply a risk-free rate. The proposed ASU also would require that, when the rate implicit in the lease is readily determinable for any individual lease, a lessee would 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.
Entities that have not yet adopted ASC 842 at the date a final ASU is issued would be required to adopt the proposed amendments when they adopt ASC 842. Entities that have adopted ASC 842 as of the date a final ASU is issued would be required to adopt the proposed amendments for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Earlier application would be permitted. Entities would be required to apply the amendments on a modified retrospective basis to leases that exist at the beginning of the period of adoption of the final ASU.
The proposed ASU is available for comment until July 16, 2021.
Call us at +1 213.873.1700, email us at firstname.lastname@example.org or fill out the form below and we'll contact you to discuss your specific situation.
This article was written by RSM US LLP and originally appeared on 2021-06-21.
2021 RSM US LLP. All rights reserved.
RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.
Vasquez & Company LLP is a proud member of the RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.
Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise and technical resources.
For more information on how Vasquez & Company LLP can assist you, please call +1 213.873.1700.
Subscribe to receive important updates from our Insights and Resources.