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FASB Issues Guidance on Use of the Risk-Free Rate in Valuing Leases Under ASC 842 for Nonpublic Companies

On November 11, 2021, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2021-09, Leases, Discount Rate for Lessees That Are Not Public Business Entities.

This ASU allows for an entity to use the risk-free rate option for a discount rate by class of asset, rather than the entity as a whole, when valuing leases under the new lease standard, Accounting Standards Codification 842, Leases.  Previously, it was an “all-or-nothing” choice where, if elected, the risk-free rate had to be used for all leases.  ASU 2021-09 goes on to say that, if the rate implicit in the lease is available, it must be used in lieu of the risk-free rate.

This is significant because, by applying the risk-free rate to every lease, an entity would end up with a liability considerably larger than using either the rate implicit in the lease or their incremental borrowing rate.

For those entities that have already adopted ASC 842, transition procedures have been provided in the ASU.  Those entities that have yet to adopt ASC 842 will simply apply the effects when implementing ASC 842.

For more information or any questions, please contact a member of the Real Estate Services Team.

Real Estate Services

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