Regulatory updates

On 27 March 2023, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU), Leases (Topic 842): Common Control Arrangements to improve lease guidance on related party arrangements between entities under common control. The key issues addressed by the ASU include:

• Terms and conditions to be considered: Topic 842 states that the entities should determine whether a related party arrangement between entities under common control constitutes a lease arrangement. If yes, then it must classify and account for the lease on the same basis as an arrangement with an unrelated party (on the basis of legally enforceable terms and conditions). The ASU has provided a practical expedient for certain private companies and not-for-profit entities to use the written terms and conditions of a common control arrangement to determine

1. Whether a lease exists, and if so
2. The classification of and accounting for such lease.

Where no written terms and conditions exist, an entity is prohibited from applying the practical expedient and must evaluate the enforceable terms and conditions to apply Topic 842.

• Accounting for leasehold improvements: Topic 842 requires the leasehold improvements to have an amortisation period, which is consistent with the shorter of the remaining lease term and the useful life of the improvements. However, it was observed that multiple methods of accounting for such improvements exist, leading to diversity in practice. In this regard, the ASU has introduced certain amendments to the leasehold improvements associated with common control leases. Such improvements should be:

1. Amortised by the lessee over the useful life of the leasehold improvements to the common control group (regardless of the lease term), as long as the lessee controls the use of the underlying asset through a lease. However, in cases where the lessor obtained the right to control the use of the asset through a lease with another entity (not within the same common control group), the amortisation period may not exceed the amortisation period of the common control group
2. Accounted for as a transfer between entities under common control through an adjustment to equity (or net assets for not-for-profit entities), where the lessee no longer controls the use of the underlying asset.

Additionally, these leasehold improvements are subject to impairment guidance in Topic 360, Property, Plant and Equipment .

Effective date: The amendments would become effective for fiscal years beginning after 15 December 2023, including the interim periods within these fiscal years. Additionally, early adoption is permitted for both interim and annual financial statements that have not yet been made available for issuance.

To access the text of the ASU, please click here