13.4 Master Lease Agreements
ASC 842-10
55-17 Under a master lease agreement, the lessee may gain control over the use of additional underlying assets during the term of the agreement. If the agreement specifies a minimum number of units or dollar value of equipment, the lessee obtaining control over the use of those additional underlying assets is not a lease modification. Rather, the entity (whether a lessee or a lessor) applies the guidance in paragraphs 842-10-15-28 through 15-42 when identifying the separate lease components and allocating the consideration in the contract to those components. Paragraph 842-10-55-22 explains that a master lease agreement may, therefore, result in multiple commencement dates.
55-18 If the master lease agreement permits the lessee
to gain control over the use of additional underlying assets during the term of
the agreement but does not commit the lessee to doing so, the lessee’s taking
control over the use of an additional underlying asset should be accounted for
as a lease modification in accordance with paragraphs 842-10-25-8 through
25-18.
55-22 There may be multiple commencement dates resulting from a master lease agreement. That is because a master lease agreement may cover a significant number of underlying assets, each of which are made available for use by the lessee on different dates. Although a master lease agreement may specify that the lessee must take a minimum number of units or dollar value of equipment, there will be multiple commencement dates unless all of the underlying assets subject to that minimum are made available for use by the lessee on the same date.
A master lease agreement may specify that the lessee will obtain control over the right to use multiple underlying assets (e.g., equipment) at various points during the term of the master lease agreement. In these cases, the lessee’s accounting depends on whether the master lease agreement commits the lessee to gaining control over the right to use a minimum quantity (units or dollar value) of assets.
13.4.1 Lessee Is Obligated or Committed to Use a Minimum Quantity
Under ASC 842-10-55-17, if the lessee is obligated or committed to the right to use a minimum quantity of assets, the entity should include the minimum quantity when separating lease components and allocating the consideration in the contract to the separate lease components (see Chapter 4). Because the minimum quantity is included in the initial separation of, and allocation to, the lease components, the lessee’s attainment of control of the right to use the underlying assets throughout the term of the master lease agreement does not result in a lease modification.
However, because the lessee may obtain control of the right to use the underlying assets at different points during the term of the master lease agreement, the separate lease components may have different lease commencement dates, as explained in ASC 842-10-55-22. For rights to use underlying assets that have yet to commence, the lessee should consider the disclosure requirements in ASC 842-20-50-3(b) (see Section 15.2.2) related to leases that have not yet commenced.
Example 13-1
On January 1, 20X1, Lessor C enters into a master lease agreement with Lessee P related to various pieces of equipment throughout a five-year term. Under the master lease agreement, P leases the following pieces of equipment from C for one-year lease terms commencing on the following dates:
- March 26, 20X1: Equipment X.
- June 7, 20X2: Equipment Y.
- September 9, 20X3: Equipment Z.
The master lease agreement states that P is obligated to lease three pieces of equipment (i.e., Equipment X, Equipment Y, and Equipment Z) at some point during the five-year term of the master lease agreement.
In accordance with ASC 842-10-55-17, because P is obligated to use a minimum
quantity of equipment, the entities (both C and P) must
consider the minimum quantity of equipment (i.e., three
pieces of equipment) when identifying the separate lease
components and allocating the consideration in the
contract. Because P obtains control of the right to use
the equipment at different points during the master
lease agreement, each lease component (i.e., for
Equipment X, Equipment Y, and Equipment Z) has a
different lease commencement date. Accordingly, P should
consider the disclosure requirement in ASC
842-20-50-3(b) for leases that have not yet commenced.
In addition, because each right of use is considered in
the initial identification and separation of lease
components, the fact that P obtains control of each
right of use at different times does not result in a
lease modification.
13.4.2 Lessee Is Not Obligated or Committed to Use a Minimum Quantity
Under ASC 842-10-55-18, if the lessee is not obligated or committed to the right to use a minimum quantity of assets, the lessee must account for the attainment of control of each additional right to use an underlying asset as a lease modification in accordance with ASC 842-10-25-8 through 25-18 (e.g., each additional right of use could be a lease modification accounted for as a separate contract in accordance with ASC 842-10-25-8). Because the lessee is not subject to a minimum commitment, the entity would not include the right to use any additional underlying assets in the initial separation of, and allocation to, the lease components in the contract. See Section 8.6 for additional information on accounting for lease modifications.
Example 13-2
Assume the same facts as in Example 13-1,
except that under the master lease agreement, Lessee P
is not obligated or committed to use a minimum quantity
of equipment throughout the five-year term of the master
lease agreement.
Because P is not obligated to use a minimum quantity of equipment, the entities
(both P and Lessor C) should account for P’s obtaining control over the right
to use each additional piece of equipment as a lease modification on the date
on which control is obtained (e.g., each modification may be accounted for as
a separate contract in accordance with ASC 842-10-25-8). In this example, the
entities will account for the master lease agreement as follows:
-
First lease commences on March 26, 20X1, when P obtains control of Equipment X.
-
First modification on June 7, 20X2, when P obtains control of Equipment Y.
-
Second modification on September 9, 20X3, when P obtains control of Equipment Z.
See Section 8.6 for additional information on accounting for lease modifications.