Since the adoption of ASC 842 (Leases) by private companies, many have faced challenges in applying its principles to common control arrangements. A typical scenario involves a non-public company leasing facilities from an entity under common control. These leases often lack formal written agreements, including terms that may be unenforceable or are inconsistently followed. This ambiguity has created difficulties for companies and their auditors in determining the correct lease terms to calculate right-of-use assets and liabilities.
The Financial Accounting Standards Board (FASB) issued ASU 2023-01 to address these issues. Under the previous guidance in ASC 842, companies were required to assess the legally enforceable terms of lease agreements, which posed significant challenges given the often unclear nature of common control leases. ASU 2023-01 alleviates this burden by allowing companies to rely on the written terms of the lease agreement without the need for rigorous evaluation of legal enforceability.
Key Changes Introduced by ASU 2023-01
1. Simplified Evaluation of Lease Terms
Previously, determining the enforceable terms of a lease under ASC 842 was a complex task, especially for common control arrangements with limited or vague documentation. ASU 2023-01 simplifies this process by permitting reliance on the written terms of the lease, reducing the compliance burden for private companies and their auditors.
2. Amortization of Leasehold Improvements
Under legacy ASC 842, leasehold improvements were generally amortized over the shorter of the lease term or the improvement’s estimated useful life. This created complications for common control leases, particularly when written terms were unavailable or the lease term was very short (e.g., 12 months or less). With ASU 2023-01, lessees in common control arrangements are required to amortize leasehold improvements over their useful life to the common control group, provided the lessee retains control of the underlying asset through the lease. This approach aligns the accounting treatment with the economic substance of these arrangements.
Effective Date
ASU 2023-01 is effective for fiscal years beginning after December 15, 2023 (e.g., calendar year 2024). Companies are encouraged to assess the impact of these changes and prepare for implementation.
How Calvetti Ferguson Can Help
At Calvetti Ferguson, we understand the complexities that ASU 2023-01 introduces. Our experienced team of audit professionals can help you with the following:
- Assess the specific impact of ASU 2023-01 on your common control lease arrangements.
- Develop and implement accounting policies and procedures that align with the new requirements.
- Prepare accurate financial statement disclosures related to common control leases.
- Collaborate with your auditors to ensure a smooth and efficient audit process.
Navigating the nuances of lease accounting doesn’t have to be overwhelming. Contact us today to learn how we can help your business adapt to ASU 2023-01 and comply with evolving accounting standards.
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