Chapter 7 — Accounting for GHG Emissions From Leased Assets

7.4 Lessor Accounting for Emissions From Leased Assets

Like lessees, lessors have to consider their consolidation approach and type of lease to properly account for GHG emissions from leased assets. Correctly identifying these factors will prevent and avoid double counting. For more information about consolidation approaches, see Chapter 2. For more information about lease classifications (which companies are advised to determine in a manner consistent with their audited financial statements), see Section 7.1 and Deloitte’s Roadmap Leases.

The table below, which is adapted from Table A.2 of the Scope 3 Standard, presents various considerations for lessors related to the classification of GHG emissions from leased assets into Scopes 1, 2, and 3.

Table 7-3 Leasing Arrangements4 and Boundaries (Lessor’s Perspective)

Consolidation Approach Used	Type of Leasing Arrangement
Consolidation Approach Used	Finance/Capital Lease	Operating Lease
Equity share or financial control	Case A: Lessor does not have ownership or financial control. Therefore, GHG emissions associated with fuel combustion and the use of purchase electricity are accounted for in Scope 3, Category 13 (downstream leased assets).	Case C: Lessor has ownership and financial control. Therefore, GHG emissions associated with fuel combustion are accounted for in Scope 1, and those associated with the use of purchased electricity are accounted for in Scope 2.
Operational control	Case B: Lessor does not have operational control. Therefore, GHG emissions associated with fuel combustion and the use of purchased electricity are accounted for in Scope 3, Category 13 (downstream leased assets).	Case D: Lessor does not have operational control. Therefore, GHG emissions associated with fuel combustion and the use of purchased electricity are accounted for in Scope 3, Category 13 (downstream leased assets).5

As illustrated in the table above, if a reporting company is the lessor in an operating lease as defined in the Scope 3 Standard and uses the equity share or financial control approach (Case C), it would account for (1) the direct GHG emissions from the leased asset in Scope 1 and (2) the indirect GHG emissions from the leased asset that are associated with the use of purchased electricity in Scope 2. This is because the lessor has accounting ownership and financial control of the asset.

As further illustrated in the table above, if a reporting company is the lessor in a finance/capital lease and uses the equity share or financial control approach (Case A) or the operational control approach (Case B), or is the lessor in an operating lease and uses the operational control approach (Case D), the reporting company is not considered to have accounting ownership, financial control, or operational control of the asset. Accordingly, the reporting company would record both the GHG emissions that are an output from the leased asset and the GHG emissions from the leased asset that are associated with the use of purchased electricity in Scope 3, Category 13. This is because in Cases A, B, and D of Table 7-2 (which correspond to Cases A, B, and D of Table 7-3), the lessee has accounting ownership or control of the leased asset and would therefore report the same GHG emissions in Scopes 1 and 2, respectively, rather than Scope 3.

Connecting the Dots

The lessee accounting illustrated in Table 7-2 is the inverse of the lessor accounting illustrated in Table 7-3. For example, the lessee’s lack of accounting ownership and financial control in Table 7-2, Case C, means that the lessor in the same arrangement does have accounting ownership and financial control (see Table 7-3, Case C). Therefore, whereas the lessee in the arrangement would account for the GHG emissions related to the leased asset in Scope 3, Category 8 (upstream leased assets), the lessor in the arrangement would account for those emissions in Scopes 1 and 2. Similarly, in each of Cases A, B, and D of Table 7-2, whereas the lessee would generally account for the GHG emissions related to the leased asset in Scopes 1 and 2, the lessor would generally account for those emissions in Scope 3, Category 13 (downstream leased assets).

A lessor’s chosen organizational boundary may affect whether the lessor reports direct GHG emissions from the leased asset and indirect GHG emissions from the leased asset that are associated with the use of purchased electricity in (1) Scopes 1 and 2, respectively, or (2) Scope 3. For example, the lessor in an operating lease that applies the operational control approach (Table 7-3, Case D) generally does not operate the leased asset it owns and therefore typically does not implement its operating policies with respect to the asset (i.e., the lessee has full operational control). Since the lessor does not control the asset from an operational standpoint, direct GHG emissions from the leased asset and indirect GHG emissions from the leased asset that are associated with the use of purchased electricity would be excluded from the lessor’s Scope 1 and Scope 2 inventories and included in its Scope 3 inventory.

Although a lessor in Table 7-3, Case D, would generally report GHG emissions from the leased asset in Scope 3, Category 13, such a lessor may report those emissions in Scopes 1 and 2 if it can demonstrate that it has operational control over the leased asset, in which case the lessor must disclose the background and reasoning that support its conclusion. This treatment is consistent with lessee accounting for leased assets. As noted in Section 7.3, if a lessee in an operating lease that applies the operational control approach concludes that it does not have operational control over the leased asset and therefore reports emissions related to the leased asset in Scope 3 instead of Scopes 1 and 2, the lessee must disclose the background and reasoning that support its conclusion.

For further illustration, consider Example 9, Case C, in ASC 842-10-55-117 through 55-123:

ASC 842-10

Example 9 — Contract for Energy/Power . . .

Case C — Contract Contains a Lease

55-117 Customer enters into a contract with Supplier to purchase all of the power produced by an explicitly specified power plant for 10 years. The contract states that Customer has rights to all of the power produced by the plant (that is, Supplier cannot use the plant to fulfill other contracts).

55-118 Customer issues instructions to Supplier about the quantity and timing of the delivery of power. If the plant is not producing power for Customer, it does not operate.

55-119 Supplier operates and maintains the plant on a daily basis in accordance with industry-approved operating practices.

55-120 The contract contains a lease. Customer has the right to use the power plant for 10 years.

55-121 There is an identified asset. The power plant is explicitly specified in the contract, and Supplier does not have the right to substitute the specified plant.

55-122 Customer has the right to control the use of the power plant throughout the 10-year period of use because:

Customer has the right to obtain substantially all of the economic benefits from use of the power plant over the 10-year period of use. Customer has exclusive use of the power plant; it has rights to all of the power produced by the power plant throughout the 10-year period of use.
Customer has the right to direct the use of the power plant. Customer makes the relevant decisions about how and for what purpose the power plant is used because it has the right to determine whether, when, and how much power the plant will produce (that is, the timing and quantity, if any, of power produced) throughout the period of use. Because Supplier is prevented from using the power plant for another purpose, Customer’s decision making about the timing and quantity of power produced, in effect, determines when and whether the plant produces output.

55-123 Although the operation and maintenance of the power plant are essential to its efficient use, Supplier’s decisions in this regard do not give it the right to direct how and for what purpose the power plant is used. Consequently, Supplier does not control the use of the power plant during the period of use. Instead, Supplier’s decisions are dependent on Customer’s decisions about how and for what purpose the power plant is used.

In the example above, Supplier can only use the power plant to deliver the specified output on Customer’s terms. Customer determines whether and, if so, when the power plant is used, as well as what amount of output the power plant will produce. Because Customer obtains substantially all of the economic benefits from the power plant (an identified asset) and has the right to direct its use, the contract contains a lease. Under the assumption that Supplier applies the operational control approach and has determined the lease to be an operating lease, Supplier, as the lessor, would report the GHG emissions related to the power plant in Scopes 1 and 2 instead of Scope 3 since the facts of the example indicate that Supplier has operational control.

7.4.1 Changes in Scope for Assets Out on Lease

Lessors may have circumstances in which assets are not leased out for the entire reporting period. Such circumstances require an assessment of how the GHG emissions related to such assets are reflected when the assets are out on lease and when they are not out on lease, as illustrated in the example below.

Example 7-7

Company A, which has a calendar year-end, uses the operational control approach to establish its organizational boundary for the reporting of GHG emissions. Company A owns Asset X. It reports direct GHG emissions from the use of Asset X in Scope 1 and the indirect GHG emissions from Asset X associated with the use of purchased electricity in Scope 2.

During 20X1, A enters into an operating lease for Asset X (i.e., as the lessor) that commences on April 1, 20X1, and results in the lessee’s obtaining operational control over Asset X. Accordingly, applying the operational control approach, A now needs to report the GHG emissions from Asset X as Scope 3 emissions. In general, entering into a lease is not a significant structural change, and the change in the classification of the GHG emissions from the leased asset is reflected from the lease commencement date (i.e., April 1, 20X1).

However, in some circumstances, entering into a lease may represent a significant structural change. In such cases, A would recalculate GHG emissions for the reporting year 20X1 by reflecting the change in scope of GHG emissions effective from January 1, 20X1 (i.e., the beginning of the reporting year). (See Section 4.1.3.2.1.) When evaluating whether the lease of Asset X results in a significant structural change, A would apply its established recalculation policy and significance threshold for evaluating structural changes (see Section 4.1.3.1) and may consider, among other factors:

The industry in which A operates.
How central Asset X is to the operations of A.
The amount of GHG emissions associated with Asset X relative to the total GHG emissions reported by A.

Footnotes

See footnote 2.

Sometimes, a reporting company that leases an asset to another entity in an operating lease may be able to demonstrate that the reporting company (lessor) does have operational control over the leased asset, especially when operational control is not perceived by the lessee. In such a case, the reporting company may report GHG emissions from fuel combustion in Scope 1 and those associated with the use of purchased electricity in Scope 2 as long as the decision is disclosed and justified in the public report.