FASB Upholds Lease Accounting Effective Date, Modifies Discount Rate

Eyes were on the Financial Accounting Standards Board (FASB) on Wednesday, November 10, 2021 when they met to discuss the possibility of delaying Topic 842, Leases for nonprofit organizations and private companies. After a brief discussion and vote, the FASB decided that Topic 842 will not be delayed and the standard is effective for periods beginning after December 15, 2021.

The following day, the FASB adopted a modification to the discount rate allowed in the lease guidance. Nonprofit organizations and private companies are required to use the implicit rate for each individual lease contract if it is readily available. Accounting Standards Update (ASU) 2021-09 permits these entities to elect the risk-free rate for each class of underlying asset when the implicit rate is not readily available. Prior to this change, the risk-free rate was required to be elected across all leases rather than by class of asset. If the risk-free rate election is not made, the entity will use its borrowing rate. 

The effective date of this update depends on if an entity adopted the leases standard before issuance of the update or not. For entities that have already adopted Topic 842, the modified retrospective approach should be used at the time of adoption for leases that existed at the beginning of the reporting period of adoption. Entities that have yet to adopt Topic 842 must adopt the amendment when they adopt Topic 842 and follow the transition guidance in the topic.

If you have questions on the lease standard or the discount rate practical expedient, contact the Johnson Lambert Team.