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FASB Issued ASU 2023-01 - Leases (Topic 842): Common Control Arrangements
Written on Mar 31, 2023
Galasso Learning Solutions
Earlier this week, the FASB issued ASU 2023-01 - Leases (Topic 842): Common Control Arrangements. The purpose of this ASU is to:
- provide a practical expedient for private entities when applying ASC 842 to arrangements between entities under common control; and
- change how lessees should account for leasehold improvements related to common control leases.
Private entities and nonprofits without conduit debt under common control arrangement will be permitted to use the written terms and conditions between the parties, without regard to their legal enforceability, to identify, classify and account for common control leases. If no written terms and conditions exist for the lease, the entity would not be permitted to apply the practical expedient and would use the legally enforceable terms and conditions to apply Topic 842. This is important because determining the legally enforceable terms of arrangements between entities under common control is difficult and could necessitate obtaining a legal opinion, thus significantly increasing the cost of compliance.
ASU 2023-01 also changes the accounting for leasehold improvement amortization for all organizations, including public entities. As a result, leasehold improvements between entities under common control will be amortized over the useful life of the leasehold improvements (regardless of the lease terms) as long as the lessee controls the use of the underlying asset through the lease.
This ASU is effective for all entities for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, even for entities that have not yet adopted ASC 842, as they could adopt immediately.