7.1 Overview | DART – Deloitte Accounting Research Tool

Accounting for GHG emissions from leased assets can be nuanced, and preparers must be careful in their analysis. Companies need to understand the types of leased assets they have so that they can correctly classify the related GHG emissions into Scope 1; Scope 2; Scope 3, Category 8 (upstream leased assets); or Scope 3, Category 13 (downstream leased assets).1 In some cases, Scope 3 emissions from products leased to customers may also be reported in Scope 3, Category 11 (use of sold products); see Section 7.2.3 for more information. To determine whether to classify a reporting company’s GHG emissions from leased assets in Scope 1, Scope 2, or Scope 3, preparers need to consider (1) the company’s elected consolidation approach for establishing its organizational boundary and (2) the lease classifications in the company’s audited financial statements.

As discussed in Chapter 2, a reporting company consolidates GHG emissions by using the equity share approach or one of the control approaches (financial control or operational control). The company’s choice of consolidation approach, which is to be applied consistently, affects whether GHG emissions from a given leased asset are classified in Scope 1, Scope 2, or Scope 3. For more information, see Sections 7.3 and 7.4.

In addition to applying a reporting company’s consolidation approach consistently, preparers will need to understand the different types of leases. Appendix A of the Scope 3 Standard, which is adapted from Appendix F of the Corporate Standard, classifies leases into two types as follows:

Scope 3 Standard, Appendix A, “Accounting for Emissions From Leased Assets,” Page 124 (Page 126 in E-Reader Version)

Differentiating Types of Leased Assets . . .

Finance or capital lease: This type of lease enables the lessee to operate an asset and also gives the lessee all the risks and rewards of owning the asset. Assets leased under a capital or finance lease are considered wholly owned assets in financial accounting and are recorded as such on the balance sheet.
Operating lease: This type of lease enables the lessee to operate an asset, like a building or vehicle, but does not give the lessee any of the risks or rewards of owning the asset. Any lease that is not a finance or capital lease is an operating lease. [Footnote omitted]

The leasing guidance in ASC 842 contains lease classification criteria for determining (1) whether a lessee would account for a lease as a finance lease or an operating lease and (2) whether a lessor would account for a lease as a sales-type lease, direct financing lease, or operating lease. However, since the GHG Protocol was released before the guidance in ASC 842 was issued, the lease classifications in the GHG Protocol are consistent with those of the FASB’s legacy leasing guidance in ASC 840. Consequently, for purposes of accounting for GHG emissions from leased assets under the GHG Protocol, preparers would determine whether a lease classified under ASC 842 is a finance/capital lease or an operating lease as defined in the GHG Protocol. For more information about lease classifications under ASC 842, see Section 8.3 (for lessees) and Section 9.2 (for lessors) of Deloitte’s Roadmap Leases.

Preparers also need to think through these various factors from a lessor’s perspective if the reporting company leases assets to another entity. Accordingly, preparers must consider the following factors when determining whether emissions from leased assets are included in a company’s GHG inventory:

The selected organizational boundary.
The lease classification.
The effective owner of the asset (i.e., landlord/lessor or customer/lessee).

Changing Lanes

As discussed in Chapter 1, the GHG Protocol organization is undertaking a comprehensive review and update of its standards. It is expected that as part of the review and update, the GHG Protocol organization will address leased assets, taking into consideration developments in recent years related to the financial accounting frameworks for leases. Companies are encouraged to carefully monitor the activities of the GHG Protocol organization to stay informed of any developments related to leased assets.