Drug Companies Want FASB to Postpone Lease Standard

February 5, 2018

Nine pharmaceutical companies seek a one-year delay in the effective date of Accounting Standards Update No. 2016-02, Leases (Topic 842). In a letter to the Financial Accounting Standards Board (“FASB”), the companies said the new guidance for embedded lease agreements creates complications in implementing the standard before the 2019 effective date for public companies.

Specifically, the pharmaceutical companies face issues with meeting the lease standard’s requirement of determining the fair value of an embedded lease contract. Drug makers regularly work with third-party manufacturers to make medicine or medicine ingredients. The contract could include an implicit asset that might be identified as a lease. If the asset is considered a lease, companies must rely on their best judgment to split the parts of the payment stream concerning the price to make the drugs and the price for the ability to use an asset required to make the drugs. In turn, pharmaceutical companies would determine how the lessor will use the identified asset during the life of the contract. Drug makers would then have to request details from third-party manufacturers about their production process.

The drug companies believe this approach could hinder their ability to value leases. A lessor may consider the information proprietary and decide to keep it from the lessee. Additionally, companies do not believe that lessors are prepared to offer all the necessary information. To address this issue, drug companies want embedded leases exempt from the standard or to receive additional guidance to reduce how many embedded leases fall under the standard.

The FASB is reviewing the letter, but a spokesperson noted that there are no current plans to change the lease standard’s effective dates.