FASB Issues ASU 2021-09, Leases (Topic 842): Discount Rate for Lessees That Are Not Public Business Entities
On Nov. 11, 2021, the Financial Accounting Standards Board (FASB) released Accounting Standards Update (ASU) 2021‑09 entitled, “Leases (Topic 842): Discount Rate for Lessees That Are Not Public Business Entities.” This ASU covers all lessees who are not public business entities which includes private companies, not‑for‑profit organizations (whether or not they are conduit bond obligors) and employee benefit plans.
Topic 842 currently provides lessees that are not public business entities with a practical expedient that allows them to make an accounting policy election to use a risk‑free rate as the discount rate for all leases. This practical expedient was provided to relieve those lessees from the cost and complexity of having to calculate an incremental borrowing rate. Private company stakeholders noted that using a risk‑free discount rate (for example, a U.S. Treasury rate) is low compared with the expected average incremental borrowing rate and could increase the entity’s lease liabilities and right‑of‑use assets recorded upon adoption of Topic 842 on the statement of financial position. FASB has addressed these concerns with the issuance of ASU 2021‑09.
Under ASU 2021‑09, lessees that are not public business entities will be able to make the risk‑free rate election by class of underlying asset, rather than at the entity‑wide level. An entity making this election will be required to disclose which asset classes it has elected to apply a risk‑free rate.
The ASU does require that when the rate implicit in the lease is readily determinable for any individual lease, the lessee 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.
The effective date of ASU 2021‑09 depends on whether or not the entity has adopted Topic 842 yet. If an entity has not adopted Topic 842 as of Nov. 11, 2021, it is required to adopt the ASU at the same time as it adopts Topic 842 using the existing transition provisions.
If an entity has already adopted Topic 842 in its financial statements as of Nov. 11, 2021, the provisions of this ASU are effective for fiscal years beginning after Dec. 15, 2021. Earlier application Is permitted. These entities are required to apply the provisions of this ASU on a modified retrospective basis to leases that exist at the beginning of the fiscal year of adoption.