FASB proposed changes Wednesday to discount rate guidance for lessees that are nonpublic business entities, with an objective of reducing the costs of implementing the board’s new lease accounting guidance.
Private companies, not-for-profits, and employee benefit plans would be among the lessees that could adopt the guidance in the proposed Accounting Standards Update. The proposal would permit lessees that are not public business entities to elect to use a risk-free rate as the discount rate for leases by class of underlying asset, rather than at the entitywide level.
The proposal also would require that when the rate implicit in any lease is readily determinable for any individual lease, a lessee would use that rate (rather than a risk-free rate or an incremental borrowing rate) regardless of whether it has made the risk-free rate election.
FASB’s proposal grew out of concerns over guidance in FASB ASC Topic 842, Leases, that currently provides lessees that are not public business entities with a practical expedient permitting them to make an accounting policy election to use a risk-free rate as the discount rate for all leases. The expedient originally was provided to relieve those lessees of the burden of calculating an incremental borrowing rate.
But some private-company stakeholders were reluctant to use the risk-free rate election for all leases. They said that in the current economic environment, a risk-free rate (for example, a U.S. Treasury rate) is low compared with their expected incremental borrowing rates. Therefore, using the risk-free rate election could increase an entity’s lease liabilities and right-of-use assets.
The guidance in the proposal is designed to address those concerns. FASB is seeking comments on the proposal, which can be submitted at the board’s website, by July 16.
— Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA’s editorial director.