FINANCIAL WATCH By Kimber Bascom, Kyle Elken, Shawn Halladay Considerations for Implementing the New Lease Accounting Standard: Lease/Non-Lease Components C HANGES resulting from the new lease accounting standard (ASC Topic 842) may result in significant costs (some obvi-ous, some subtle) for lessors and lessees. To mitigate the impact, planning should commence now. This article focuses on considerations associated with the accounting for lease and non-lease components of a contract. FIGURE 1 Managed solution transactions, AKA bundled leases, are becoming increas-ingly common in the market as more customers shift to consumption mod-els. Growing customer demand is creat-ing opportunities for lessors, particularly captives, to blend low margin equipment with traditionally higher margin deliv-erables such as maintenance, consuma-bles and professional services. Although seamless in appearance to customers, les-sors must parse these transactions into lease and non-lease components. This article focuses on the lessor accounting for these components. Contract 1 Lease of asset A Lease of asset B Lease of asset C Contract 2 Lease of asset D Lease of asset E Separate lease component Separate lease component Separate lease component Separate lease component Separating components of a contract If a contract contains a lease, Topic 842 requires lessees and lessors to identify and separately account for the compo-nents of the contract. This accounting, summarized in the following steps, is generally different than the accounting that would result from combining the components. STEP 1: Identify the separate lease components if more than one asset is being leased. STEP 2: Identify any non-lease compo-nents—e.g., maintenance or operating services. STEP 3 : Measure the “consideration in the contract.” accounting (including lease classifica-tion) is applied to each “separate lease component.” A lease component may contain the right to use more than one underlying asset as illustrated by Figure 1. The lease component evaluation focuses primarily on the level of in-tegration, interrelation and/or inter-dependence between the rights of use conveyed under the contract. A right to use an underlying asset (i.e., a lease), or a bundle of such rights is a separate lease component if ● ● the lessee can benefit from it either on its own or together with other re-sources that are readily available (i.e., the lessee already has them or can readily acquire or lease them); and ● ● the lease (or bundle of leases) is not highly dependent on or highly inter-related with the other leases in the contract. A lease is highly dependent on or highly interrelated with another lease if FIGURE 2 each significantly affects the other. For example, the lease of an aircraft engine and the lease of the airframe that the en-gines are attached to each significantly affects the other. Conversely, the lease of an aircraft and the lease of a fuel truck do not significantly affect each other. STEP 2: Identify any non-lease components In addition to lease components, a contract may transfer other goods or services (i.e., non-lease components) to the lessee (e.g., when the lessor agrees to provide maintenance for a machine that it leases to a lessee). In that case the consideration in the contract is allocated between the lease and non-lease components. An element of a contract is not a “component” if it does not transfer a separate good or service to the lessee (See Figure 2). Payments associated with elements of a contract that are not components sideration in the contract between the lease and non-lease components. STEP 1: Identify the STEP 4: Separate and allocate the con-Example non-lease components Providing consumables or other supplies Equipment maintenance Operations services Not a component Delivering the leased asset Reimbursement of lessor costs (e.g., property taxes and insurance) Residual value guarantees separate lease components. If a contract includes the right to use more than one underlying asset, lease 44 NOVEMBER/DECEMBER 2016 EQUIPMENT LEASING & FINANCE MAGAZINE