The amendments in a Financial Accounting Standards Board (FASB) proposed Accounting Standards Update (ASU), Leases (Topic 842): Discount Rate for Lessees That Are Not Public Business Entities would allow non-public business entities more flexibility in choosing a discount rate or electing to use the risk-free rate for recording lease transactions. The changes would apply to all not-for-profit (NFP) entities, such as private colleges and universities, including those that are conduit debt obligors.
Currently, non-public business entities can adopt a practical expedient and use a risk-free rate as the discount rate for all leases. However, the practical expedient can be avoided in low interest rate environments because when risk-free rates are lower than incremental borrowing rates, the result is higher lease liabilities and right-of-use assets.
The proposed ASU addresses this concern by allowing non-public business entities, such as NFP institutions, to make the risk-free rate election by class of underlying asset, rather than entity wide. However, when the rate implicit in the lease is readily determinable for any individual lease, the lessee would use that rate, regardless of whether it has made the risk-free rate election. When the risk-free rate election is made, entities will be required to disclose the asset classes for which it has elected to apply a risk-free rate.
The comment period for the proposed update ends July 16, 2021. NACUBO comments will support FASB’s proposal.