On June 16, 2021, the Financial Accounting Standards Board (FASB) released a proposed Accounting Standards Update (ASU) related to the Leases standard (Topic 842). The proposed ASU would improve the discount rate guidance for lessees that are not public business entities which includes nonprofit organizations, private companies and employee benefit plans.
Under the new lease standard, that needs to be adopted for fiscal years beginning after December 15, 2021, these entities can utilize a practical expedient so these entities could establish an accounting policy election to use a risk-free rate as the discount rate for all leases. An example of a risk-free rate is a Treasury rate.
However, feedback from many stakeholders was that this risk-free rate election in the current environment was leading to an increase in the entity’s lease liabilities and right-of-use assets recorded in the statement of financial position.
The amendments in the proposed ASU address this concern by permitting these entities to make the application of the practical expedient by class of underlying asset instead of entity-wide. In addition, the amendments state that if there is a rate implicit in the lease that can be determined, that rate should be utilized instead of the risk-free rate or an incremental borrowing rate, regardless of whether it has made the risk-free rate election.