Leases — FASB Discusses Nonpublic Entities

Published on: 26 Sep 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."

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