Proposed updates to ASC 842


Authored by RSM US LLP

The Financial Accounting Standards Board recently issued a proposed Accounting Standards Update (ASU) to address issues arising from the adoption of Accounting Standards Codification Topic 842, Leases. If finalized, the proposed amendments would:

  • For lessors, amend lease classification requirements for leases in which the lease payments are predominantly variable and not based on an index or rate by requiring lessors to classify and account for those leases as operating leases. This would mitigate the risk of lessors recognizing losses at lease commencement for sales-type leases that are expected to be profitable, resulting in financial reporting that better represents the economics underlying the lease.
  • For lessees, provide the option to remeasure lease liabilities for changes in a reference index or a rate affecting future lease payments at the date that those changes take effect. The option would be required to be applied as an entity-wide accounting policy election.
  • For lessees and lessors, change the requirements when there is an early termination of some (but not all) leases within a contract that does not economically affect the remaining leases in that contract. In such circumstances, entities would be exempt from applying modification accounting to the remaining leases if the economics of those remaining leases are not changed by the early terminations.

The proposed ASU, Leases (Topic 842): Targeted Improvements, is available for comment until December 4, 2020.