Embedded Lease
An embedded lease is a lease contained in a contract that is not labeled as a lease, such as a service, supply, or outsourcing agreement, but that conveys the right to control the use of an identified asset.
Leasing
Explanation
Under ASC 842 and IFRS 16, a contract contains a lease when there is an identified asset and the customer has the right to control its use for a period of time. Control means the customer obtains substantially all of the economic benefits from use and has the right to direct how and for what purpose the asset is used. An asset is not identified if the supplier has a substantive right to substitute it throughout the period of use. Typical examples are dedicated equipment in a manufacturing supply deal, dedicated vehicles in logistics contracts, or specified servers in data center arrangements. Once identified, the lease component is separated from non-lease components unless a practical expedient to combine them is elected. Lessees can elect this expedient under both standards; lessors only under ASC 842 and only when specific conditions are met.
Why It Matters
Embedded leases are easy to miss because they sit in procurement or sales contracts rather than in a lease register. Lessees need a contract screening process before leases reach SAP CLM; lessors need to split the lease component from service revenue in SAP RAR.
Related Terms
Lessor and Lessee · Right-of-Use Asset · Performance Obligation · Practical Expedient · ASC 842 · Lease and Non-Lease Components · Equipment-as-a-Service
Related Articles
• Leases in Bundled Contracts: Separating Lease and Non-Lease Components
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