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COVID's Impact on FASB Proposed Changes


As the accounting profession navigates the challenges brought on by COVID-19, FASB shifted the deadline to grant private companies more breathing room to achieve compliance with its major lease accounting standards, including ASC 842, and recently released proposed changes to its lease guidance - some of which are a direct result of the pandemic.

Dec 3rd 2020
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From FASB's newly proposed changes released in late October, the third item - Modifications Reducing the Scope of a Lease Contract - is a proposed change that the profession has not previously seen. If accepted, this item has the potential to increase in frequency if lessees continue to consider partial terminations, impairments and abandonments, which have been occurring more frequently since COVID-19 began. The proposed change would ease accounting processes for terminations of one asset within a contract (e.g., a master lease agreement) that does not impact the other assets accounted for in the same agreement - a situation that has been on the rise since the pandemic began.

Though the future of many businesses remains uncertain, FASB has accommodated the accounting profession as it continues to navigate the changes brought on this year. New lease accounting changes might still arise as the landscape continues to shift, but compliance remains critical due to the time-consuming nature of the work required to achieve it. Although the road to compliance is no small feat, the financial rewards businesses can achieve in return are immense.

COVID-19 and Lease Modification

From delaying the deadline for compliance to introducing new proposed guidelines, FASB enacted and proposed several changes this year, including the recent updates to its modification guidance. For background, a lease modification is defined as a change in the scope of a lease, or the consideration for a lease, that was not part of the original terms and conditions of the contract. Adding or terminating the right to use one or more underlying assets or extending or reducing the contractual lease term would be considered a lease modification.

With the newly proposed change - Modifications Reducing the Scope of a Lease Contract - this shift would alter the requirements if there is an early termination of some leases within a contract that does not financially affect the remaining leases in that contract for both lessees and lessors. In those situations, entities would be exempt from applying modification accounting to the remaining leases, so there is ultimately no change to the accounting for those remaining leases.

This can extend beyond master lease agreements and could apply to any lease arrangement with multiple components, even if they weren’t originally identified or were identified separately. For example, if a lessee enters into an agreement to lease multiple floors in an office building, initially it may not have been important for the tenant to identify each floor as a separate lease component.

However, if the tenant adjusts the agreement to reduce the number of floors leased, the changes proposed by the exposure draft (ED) may be applicable regardless of whether the entity originally identified each floor as a separate component or not in the contract at all. While this particular situation would typically impact financial reporting, this proposed change would eliminate the impact of the modification accounting in these circumstances.

Act Now Regardless of Deadline

As with any profession, today there are many uncertainties in the lease accounting sector as a result of COVID-19. While additional proposed changes from FASB may be on the horizon in order to accommodate lease reporting from 2020 in Q4, the accounting profession does not anticipate that the ASC 842 compliance deadline will move again. Achieving lease accounting compliance is a time-consuming process, it’s imperative that organizations start - or continue - on their journey to compliance to stay on track to meet the deadline next year.

To achieve compliance with FASB lease accounting guidelines by the deadline, private companies and government entities need to compile, review and report all lease data. This is no easy feat. It requires cross-functional coordination – and as such this work should be addressed immediately so there is ample time to assemble, track and analyze a company’s lease portfolio – especially if manual systems are in place today versus a centralized lease data repository.

A centralized system is ideal for companies to efficiently manage leases and will enable businesses to save time and money down the road. In addition to setting up for lease compliance success -- once critical data is organized in the system -- overall lease financials can become easily accessible. By doing so, companies will be able to realize hard- and soft-dollar cost-savings benefits due to improved efficiencies, the ability to see and avoid overpayments and to flag potentially costly mistakes in tax reporting.

Final Thoughts

The accounting profession remains nimble and has proven that it’s able to adjust its standards and practices quickly to navigate profession challenges brought on by the pandemic. With the latest proposed FASB changes, companies impacted by COVID-19 will have new reporting options designed to accommodate assets they may have reassessed.

As the deadline for private companies to become compliant with FASB standards is looming, companies need to forge ahead now and give themselves ample time to meet their reporting requirements.

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