Change in the guidance on leases related to discount rates

On 11 November 2021, the FASB issued Accounting Standards Update (ASU) No. 2021-09 Discount Rate for Lessees That Are Not Public Business Entities.

Before the issuance of ASU 2021-09, ASC 842-20-30-3 Leases permitted lessees that are not public business entities (including private companies, not-for-profit organizations, and employee benefit plans) to “use a risk-free discount rate for the lease, determined using a period comparable with that of the lease term, as an accounting policy election for all leases”.

Some private company stakeholders expressed doubts about the provision requiring the risk-free rate election for all leases and consider it not practical if needed to be applied for all leases without exception.

To address these concerns, the amendments in the ASU 2021-09 allow lessees that are not public business entities to make the risk-free rate election by class of underlying asset, rather than at the entity-wide level. It also requires that, when the rate implicit in the lease is readily determinable for any individual lease, a lessee use that rate (rather than a risk-free rate or an incremental borrowing rate), regardless of whether it has made the risk-free rate election.

This change is expected to allow greater flexibility while keeping the adoption costs at acceptable level.

The new provision is to be applied for fiscal years beginning after December 15, 2021 or upon adoption of Topic 842 Leases using modified retrospective approach.

The ASU 2021-09 is available at

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