Accounting Standard Updates
12 Days of SSAP: Leases – Common Control Arrangements
Hot Take:
JLK Rosenberger is carrying on our holiday tradition of taking a new perspective on a holiday classic – the Twelve Days of Christmas. Rather than filling your head with turtle doves and gold rings, we are focusing on the latest changes to SSAP and how they will impact your insurance entity in 2024 and beyond.
This GAAP update to the lease standard has two purposes: to simplify and lessen the burden of recognizing and recording leases falling within entities under common control and to provide guidance on leasehold improvements between lessees under common control. As expected, statutory insurance accounting for these issues differs in principle but allows certain modified application.
Full Article
The ASU 2023-01 update came out as a response to private company stakeholders’ concerns about applying Topic 842 to related party arrangements between entities under common control, mainly related to the costs associated with implementing the standard. Additionally, simplified guidance was expected to reduce diversity in practice by entities within the scope when applying lease accounting requirements.
The update primarily addressed two issues:
- Use of terms and conditions for identifying and recording a lease
- Accounting for leasehold improvements
Issue 1 – Terms and Conditions to Be Considered
Prior to the issuance of this update, ASC 842 required all leases between related parties, including entities under common control, to be accounted for based on their legally enforceable terms and conditions. The update provides a practical expedient for arrangements between the entities under common control to use existing written terms and conditions of the arrangement to determine whether it contains a lease rather than using the legally enforceable terms and conditions. If the arrangement is or includes a lease, the entity may apply ASC 842 to classify and account for the lease, either operating or financing.
If there are no written terms and conditions, the update allows entities to document any existing unwritten terms and conditions so that the practical expedient can be applied. Otherwise, the entity is prohibited from applying the practical expedient and must evaluate the enforceable terms and conditions to apply ASC 842.
Issue 2 – Accounting for Leasehold Improvements
Before the update, the guidance required the lessee to amortize leasehold improvements under leases between entities under common control over the shorter of the remaining lease term or the useful life of the leasehold improvement.
Under the revised guidance, the lessee should amortize leasehold improvements over the economic life of the improvements as long as the lessee controls the use of the underlying asset, regardless of lease terms. However, if the lessor obtained control of the asset from another lease with an unrelated party, the amortization period may not exceed the lessor’s lease term with the unrelated party. When the lessee can no longer control the use of the underlying asset, the lessee records a distribution to the common control lessor through an adjustment to equity
Statutory Treatment
During the Summer Meeting, regulators adopted ASU 2023-01 with modifications. SSAP Nos. 19 and 73 were modified to align with existing guidance and reject the practical expedient for private companies. Under the adopted revisions, leasehold improvements should be amortized over the useful life of those improvements to the holding company group as long as the lessee controls the use of the underlying asset through a lease. If the lessor obtained the right to control the use of the underlying asset through a lease with another entity not within the same holding company group, the amortization period would not exceed the amortization period of the holding company group.
Effective Date: fiscal years beginning after December 15, 2023
