Comments: proposed leasing improvements

On December 4, Grant Thornton submitted a comment letter in response to the FASB’s proposed improvements related to implementing the new leasing guidance in ASC 842. The firm believes that the proposed amendments do in fact respond to three implementation issues described in the proposed ASU, and feel that the proposed amendments will lead to accounting outcomes that better reflect the economic substance of leasing activities while reducing the cost and complexity of applying the guidance.

We offer a few suggestions that we believe will improve the proposed guidance, as follows:

• The Board should gather feedback from financial statement preparers on the operability of the proposed changes to accounting for sales-type leases with significant variable payments. Depending on that feedback the Board might consider raising the variable payments threshold from predominant to a level such as substantially all to enhance operability.
• One shortcoming of the proposed model is that it does not reflect the conversion of asset risk into credit risk, even though the lessor has effectively transferred control of the underlying asset to the lessee. In the appendix to our letter, we describe an alternative method that the Board might consider that would reflect this change in the type of risk, without requiring recognition of a day-one loss.
• We suggest aligning the proposed guidance on remeasuring the lease payments for changes in an index or rate with the corresponding guidance in IFRS 16, Leases.
• The concept of a “partial termination” associated with a single lease component could continue to create challenges in applying the partial termination modification model and may require additional clarification in ASC 842. In the meantime, we suggest that the partial termination example in ASC 842 be revised to illustrate how to apply the proposed guidance on partial terminations.

Download our letter to read our comments in full.