Roundtable Raises Question on Whether to Redefine Leases

An FASB lease accounting roundtable discussion on September 18 raised the surprising question of whether the board needs to revise the definition of a lease. FASB Chairman Richard Jones asked a panel of financial statement preparers, users, and practitioners whether the board should revisit the definition of a lease in light of scenarios related to embedded leases. “Those of you who are with public companies or work with public companies have lived through the whole embedded lease issue and the challenges of identifying embedded leases in transactions when the assets owned by the owner get operated by the owner, there’s no way the owner could ever let the customer operate it, but there’s a lease in there, even though there’s a substantial service. When I think of the private companies it seems like that issue is going to be one of the toughest issues,” Jones said. “But I didn’t hear any comments about should we revisit the definition of a lease and looking at whether assets that are owned and operated by the owner, should those really be leases to begin with. That’s something that I expected to hear more about particularly in the private company space.” Panelists, especially in the public company space, said tweaking the definition of leases once more would likely not make much difference to the issues cropping up because the board did not make drastic changes to it when it developed ASC Topic 842, Leases.

Task Force’s Decisions Related to Warrant Modifications Proposed

On September 16, FASB voted to propose its task force’s decisions to clarify how to account for modifications of free-standing equity-classified derivative instruments. The topic relates to a consensus reached by the Emerging Issues Task Force (EITF) on September 3 regarding the accounting for modifications of equity-classified items that remain equity classified after modification. One example is warrants, that is, instruments under which an investor has the right to purchase a specific amount of common stock from an issuer at a specified price. As a result of lack of explicit rules in the GAAP codification, companies have generally been analogizing to various guidance to report such items. The issue would be of interest to technology startups or research and development entities in the pharmaceutical sector which are not yet able to generate enough revenue or cash flow to fund their ongoing operations, according to a board summary on the topic. “I think [the proposal] will help narrow practice,” FASB Chairman Richard Jones said. “I do believe the benefits justify the costs in this regard.” The board plans to issue the proposal in October with a 60-day comment period.


Audit Challenges Likely in Initial Application of Credit Loss Accounting Rules.

PCAOB Chief Auditor Megan Zietsman said that the board has hit the pause button on some of the outreach efforts related to auditing FASB’s new credit loss rules because of COVID-19 and the delayed effective dates for smaller banks in applying the standard. The current expected credit loss (CECL) model is required by FASB’s Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, issued in June 2016. It represents a major change to the incurred loss model banks have traditionally used. Banks wrote down losses after borrowers essentially defaulted on their payments. The new accounting rule requires banks and other lenders to look to the future, make reasonable and supportable estimates, and calculate potential losses on loans and certain securities as soon as they issue them and set aside corresponding loss reserves. “What we did learn from the outreach was that the feedback from auditors was that auditing CECL for the first year would be a challenge. No surprise there,” Zietsman said during the AICPA’s National Conference on Banks & Savings Institutions, held virtually on September 14, 2020. “But we were encouraged to hear that auditors were thinking proactively about challenges, and they were engaged with their clients in terms of thinking through what this is all going to mean. But we also heard that the effective date delay was very helpful and well received.” CECL went into effect in 2020 for larger SEC filers; smaller reporting companies and nonpublic companies have until 2023.