Lease and Non-Lease Components

Explanation

Under ASC 842 and IFRS 16, each lease component is generally accounted for separately from the non-lease components. Activities that do not transfer a good or service to the customer, such as administrative tasks, are not components. Under ASC 842, reimbursements of lessor costs such as property taxes and insurance are not components either.

• Lessors allocate the consideration using the revenue guidance (ASC 606 / IFRS 15), generally based on relative standalone selling prices. Under ASC 842, a lessor may elect, by class of underlying asset, not to separate when the components have the same timing and pattern of transfer and the lease component would be an operating lease. IFRS 16 offers lessors no such expedient.

• Lessees allocate on a relative standalone price basis. Both standards let lessees elect, by class of underlying asset, to account for the lease and its associated non-lease components as a single lease component.

Why It Matters

Bundled equipment contracts often carry one monthly fee; the split determines which part follows lease accounting and which follows revenue recognition. In SAP Revenue Accounting and Reporting (RAR), lessors can keep lease and non-lease components as separate performance obligations in one revenue accounting contract with consistent allocation.

Related Terms

Embedded Lease · Standalone Selling Price (SSP) · Allocation · Practical Expedient · Operating Lease · ASC 842

Related Articles

• Leases in Bundled Contracts: Separating Lease and Non-Lease Components

• IFRS 16 vs. ASC 842: Key Differences for Lessors