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ASC 842 FASB Proposes to Improve Discount Rate Guidance for Lessees for Not Public Business Entities

On June 16 2021, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU) that would improve discount rate guidance for lessees that are not public business entities. Private companies, not-for-profit organisations, and employee would benefit from the plans.

ASC 842 allows private companies to make an accounting optional policy election to use a risk-free rate as the discount rate for all leases. The standard requires this election to be made at the entity-wide level for the entire lease portfolio. The FASB initially provided this practical expedient to relieve those lessees from calculating an incremental borrowing rate, which could create unnecessary cost and complexity. The FASB’s proposal released in June would amend that requirement and permit lessees that are not public business entities to elect to apply the risk-free rate at asset class rather than at the entity-wide level.

The implementation experience of adopting ASC 842 has shown that determining the incremental borrowing rate is a complex process. The risk-free rate policy election would help simplify implementation and reduce costs, providing private companies with the flexibility to strategically apply the risk-free rate or incremental borrowing rate at an asset class level.

To read the proposed ASU, follow this link. The FASB encourages stakeholders to review and submit comments on the proposed ASU by July 16, 2021.

How Can VIP Apps Consulting Help?

VIP Apps Consulting lease accounting experts is a multi-disciplinary team with extensive experience within the leasing financial services industry. Our team has the knowledge, capabilities, and operational experience to help organisations assess and implement the required process and system changes in their transition to the New Lease Accounting Standards IFRS 16 / FASB ASC 842. Our experience has positioned us to help your organisation address issues from accounting interpretation, business process design and optimisation to systems changes and new implementation, providing the change management support to address the new lease accounting adoption challenges.

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