This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.
The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox.

Journal entry — Leases — FASB discusses nonpublic entities

Published on: Sep 26, 2012

At its meeting yesterday, the FASB made tentative decisions about the accounting for leases by nonpublic entities regarding (1) the determination of their incremental borrowing rate, (2) disclosures, and (3) related-party leases.

Incremental Borrowing Rate

The FASB previously decided jointly with the IASB that the discount rate used by lessees to calculate the right-of-use asset and lease obligation should be the rate the lessor charges the lessee if such rate is available. If that rate is not available, which is expected to be the case in most situations, the lessee should use its incremental borrowing rate as of the date of lease commencement. At yesterday’s meeting, the Board tentatively decided that nonpublic lessees can elect, as an accounting policy, to use the risk-free interest rate for measuring all leases.


The Board tentatively decided to exempt nonpublic entities from the requirement to disclose a reconciliation of the beginning and ending balances of the lease liability.

Related-Party Leases

In a meeting handout, the FASB noted that nonpublic entities often “enter into lease arrangements with entities that are owned by related parties or by the owner of the operating company.” Accordingly, the Board discussed whether specific related-party recognition and measurement guidance should be provided for these arrangements. The Board tentatively agreed to eliminate the guidance under ASC 840-10-25-261 that requires entities to evaluate related-party leases on the basis of their substance rather than their legal form. In addition, the Board decided that entities should refer to the guidance in U.S. GAAP on related-party transactions for providing disclosures related to such transactions.

The Board also discussed whether related-party leases would be considered cancellable or noncancellable leases (which would affect whether such leases are within the scope of the proposed leases guidance). Ultimately, the Board decided against a presumption that related-party leases would be considered noncancellable.

Watch for Deloitte’s upcoming Heads Up for an overview of decisions made by the FASB and IASB in their leases project.



1 For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s "Titles of Topics and Subtopics in the FASB Accounting Standards Codification."

Accounting Journal Entries Image

Related Topics

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.