ASC 842: FASB proposes discount rate amendment for nonpublic entities

On June 16, 2021, the Financial Accounting Standards Board (FASB or Board) issued a proposed Accounting Standards Update (ASU) amending Accounting Standards Codification (ASC) 842. The amendment would provide private (nonpublic) organizations, including all not-for-profit entities, with additional guidance and flexibility in how they determine the discount rate.

Currently, ASC 842 provides nonpublic lessees with a practical expedient that allows them to make an optional accounting policy election, to use a risk-free rate as the discount rate for all leases at an entity-wide level. The purpose of this initial practical expedient is to provide relief to lessees when calculating their incremental borrowing rate for each lease and to reduce the complexity and cost of applying the guidance.

However, the feedback the FASB received during the post-implementation review process of ASC 842, uncovered that some private-company stakeholders were reluctant of using the risk-free rate election for all their leases, as this could significantly increase an entity’s lease liabilities and right-of-use assets.

The proposed amendment has been specifically designed to alleviate those concerns, as they would permit nonpublic lessees to use the risk-free rate election by class of underlying asset, rather than at the entity-wide level. Those lessees that make the election would be required to disclose which asset class or classes it has chosen to apply the risk-free rate.

The proposal would also require that, when readily determinable, the rate implicit in the lease is used, irrespective of whether the lessee has made the risk-free rate election. 

You can find the full proposal here.

How IRIS Innervision can help

Since the issuance of ASC 842 in February 2016, the Board has issued multiple updates and changes to address the implementation concerns faced by preparers (the most recent being the proposed discount rate amendment) and twice deferred the effective date for private companies.

Reminder: For private organizations and certain not-for-profit entities, ASC 842 is effective for annual periods beginning after December 15, 2021, and interim periods within annual periods beginning after December 15, 2022.

To help organizations effectively apply the changes. IRIS Innervision has developed functionality within our lease accounting solution that accommodates these updates and makes it easier for private companies to meet and maintain compliance with the new standard.

To find out how IRIS’ lease accounting software can help fast-track your lease accounting project, request a free personalized demo today.

Disclaimer: this article contains general information about the new lease accounting standards only and should NOT be viewed in any way as professional advice or service. The Publisher will not be responsible for any losses or damages of any kind incurred by the reader whether directly or indirectly arising from the use of the information found within this article.