4.1 Introduction
The phrase “whether a contract is or contains a lease” (emphasis added)
is consistently used throughout ASC 842-10-15 and
Chapter 3 of
this Roadmap. The reason behind this wording
choice is more fully explained in Section
3.2.2 — a lease may be embedded in a
larger service arrangement. When that is the case,
contracts contain both lease and nonlease
components. Generally, the nonlease components are
services that the supplier is also performing for
the customer. For example, in a single contract,
the supplier could be leasing equipment to a
customer while also agreeing to provide ongoing
maintenance services for the equipment throughout
the period of use.
Further, in paragraph BC143 of ASU
2016-02, the FASB acknowledges that contracts may contain
multiple lease components. Paragraph BC143 of ASU 2016-02 cites a contract
for the right to use a marine port as one example of a contract that may contain
several lease components (e.g., leases of land, buildings, and equipment).
Changing Lanes
More Guidance on How to Separate, and Allocate
Consideration to, Components of a Contract
ASC 840-10-15-16 through 15-19 (formerly EITF Issue 01-8) required separation
of, and allocation of consideration to, lease and nonlease components.
However, ASC 840 provides little guidance on how to perform such separation
and allocation. Accordingly, the FASB recognized the need for more
comprehensive guidance on accounting for contracts that contain multiple
components. Specifically, paragraph BC144 of ASU 2016-02 states:
Previous GAAP provided limited guidance on how to
separate lease components and nonlease components of a contract,
even though it required that separation. Because Topic 842 results
in lease components of a contract being accounted for differently
from nonlease components (for all leases except short-term leases
for which a lessee elects the recognition and measurement
exemption), the Board decided to provide expanded guidance on how
entities should account for contracts that contain both lease
components and nonlease components.
Paragraph BC144 of ASU 2016-02 explains that, because the customer’s accounting for a lease
results in balance sheet recognition (except for short-term leases — see Chapter 8 for detailed
discussion of lessee accounting) while its accounting for a service generally does not, ASC 842
places additional emphasis on the separation of lease and nonlease components. That is, the
Board is increasing the importance of appropriately identifying the components of — and
consideration in — a contract that is subject to balance sheet recognition. In addition, since
operating leases have different income statement effects than finance leases, separation of
multiple lease components remains relevant.
The guidance in ASC 842-10-15 effectively establishes the following process for identifying the contract
component(s) (i.e., the units of account) and consideration subject to lease accounting:
- Considering whether the contract involves the use of PP&E, as covered in ASC 842-10-15-1 (see Chapter 2).
- Assessing whether that contract is, or contains, a lease, as addressed in ASC 842-10-15-2 through 15-27 (see Chapter 3).
- Determining which lease component(s) in that contract is (are) subject to the recognition and measurement guidance in ASC 842, as covered in ASC 842-10-15-28 through 15-42 (discussed in the remainder of this chapter).
The third part of the process is expanded in the graphic below, which outlines steps related to considering how to separate, and allocate consideration to, components in a contract under ASC 842. Each of these steps is discussed in greater detail in the remainder of this chapter.