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Chapter 4 — Components of a Contract

4.3 Identify the Separate Nonlease Components

4.3 Identify the Separate Nonlease Components

ASC 842-10
15-30 The consideration in the contract shall be allocated to each separate lease component and nonlease component of the contract (see paragraphs 842-10-15-33 through 15-37 for lessee allocation guidance and paragraphs 842-10-15-38 through 15-42C for lessor allocation guidance). Components of a contract include only those items or activities that transfer a good or service to the lessee. Consequently, the following are not components of a contract and do not receive an allocation of the consideration in the contract:
  1. Administrative tasks to set up a contract or initiate the lease that do not transfer a good or service to the lessee
  2. Reimbursement or payment of the lessor’s costs. For example, a lessor may incur various costs in its role as a lessor or as owner of the underlying asset. A requirement for the lessee to pay those costs, whether directly to a third party or as a reimbursement to the lessor, does not transfer a good or service to the lessee separate from the right to use the underlying asset.

Footnotes

6
In July 2018, the FASB issued ASU 2018-11, which includes a practical expedient that allows lessors, when certain conditions are met, not to separate lease and nonlease components. Lessors availing themselves of this practical expedient would not account for affected nonlease components separately. See Sections 4.3.3.2 and 17.3.1.4.2 for further discussion.
7
See footnote 6.
8
See footnote 6.
9
As discussed in Section 4.3.3.1, lessees can elect a practical expedient by asset class to combine lease and nonlease components into a single component. A similar practical expedient is available to lessors by asset class as long as certain criteria are met (see Section 4.3.3.2). When this practical expedient is elected, any consideration that would otherwise be allocated to the nonlease components, such as payments for noncomponents described in this section, will instead be accounted for as part of the related lease component or the predominant revenue component for lessors. In other words, if the practical expedient is elected, no allocation between lease and nonlease components is necessary.
10
While this discussion focuses on lessees, in December 2018, the FASB issued ASU 2018-20, which makes narrow-scope improvements to the accounting for lessors. Under the ASU’s amendments, lessors are allowed to elect, as an accounting policy, to analogize to the guidance in ASC 606 on presenting sales taxes collected from lessees on a net basis. See Section 4.4.2.1.2 for more information about the ASU.
11
Note that sales tax imposed on the basis of a lessee’s usage of a leased asset would also be deemed a variable lease payment that does not depend on an index or rate.
12
The guidance in Section 4.3.2.3.1 is only applicable if sales tax is determined to be an obligation of the lessor.
13
Importantly, not all over-time performance obligations will qualify for the practical expedient. Lessors should consider the measure of progress used to recognize revenue related to the nonlease component when assessing the condition in ASC 842-10-15-42A(a).
14
Upon adoption of ASU 2021-05, an entity should apply the guidance in ASC 842-10-25-2 through 25-3A to evaluate the lease classification.
15
ASC 842-10-25-5 states that “an entity shall consider the remaining economic life of the predominant asset in the lease component” to determine the classification when multiple underlying assets comprise a single lease component.
16
ASC 606-10-55-65A allows entities to use the sales-based and usage-based royalty exception to estimating variable consideration when “a license of intellectual property is the predominant item to which the royalty relates (for example, the license of intellectual property may be the predominant item to which the royalty relates when the entity has a reasonable expectation that the customer would ascribe significantly more value to the license than to the other goods or services to which the royalty relates).”
17
Although an entity must apply the practical expedient to all eligible nonlease components, the presence of a nonlease component (or components) that is ineligible for the practical expedient does not preclude a lessor from applying the practical expedient to the eligible components.