Share this
How to Address Embedded Leases Under ASC 842
by Matt Waters, CPA on April 17, 2019
Embedded leases can be difficult to identify, but ASC 842 is making it essential to look. Most embedded leases are contained in contracts for services that involve the use of a related asset, which is controlled by the customer. Many companies are surprised to find that leased assets are “embedded” in other agreements that are often not labeled as a “lease”.
Almost any company in any industry is likely to discover embedded leases in their portfolio of service contracts. Likely places to look are within IT agreements for server space, fiber, or bandwidth.
What is the risk associated with embedded leases?
Under old lease accounting guidelines, there was not much difference in the treatment of an embedded lease component and a service component. It was really just geography on the income statement. However, under new rules, the lease component will almost always generate a lease liability and right of use asset in addition to rent expense. So, now the balance sheet is impacted, and auditors are on the lookout for unrecorded lease assets and liabilities.
How to identify embedded leases?
Many companies have had success sending surveys to business units asking if any assets have been obtained associated with contracts. It’s important to specify that the contracts don’t necessarily have to be labeled as “leases”. Basically, if an asset is obtained for company use outside of the fixed asset procurement process, the accounting team should evaluate the contact for potential lease treatment. It’s important for companies to set accounting policies around identifying and accounting for leased assets and the best practice is to discuss those policies with company auditors well in advance of the audit cycle.
Did FASB provide any practical expedients regarding embedded leases?
The answer to this is “sort of”. FASB included some language regarding materiality in ASC 842 literature, so companies have the opportunity to set reasonable thresholds to exclude immaterial assets and liabilities from consideration. FASB also offered companies the option to avoid reassessing if a contract contains a lease or not. However, this assumes the contract was assessed under the old guidance. The expedient is not indented to “grandfather” errors, and many embedded leases were simply not evaluated at all in the past. Some companies have found the practical expedient to include lease and non-lease components together as lease components useful in simplifying the compliance effort. This is less common, as it does result in a grossed-up lease liability and right of use asset. To help ensure embedded leases are identified and properly recorded, companies can rely on CoStar’s feature-rich lease accounting and lease management software.
Share this
- ASC 842 (81)
- Lease Accounting Software (74)
- Accounting Teams (39)
- Lease Administration Software (25)
- Retail Tenants (15)
- Commercial Real Estate (12)
- Lease Management (11)
- Market Data and Analytics (7)
- Real Estate Teams (7)
- ESG (5)
- Success Stories (5)
- News and Media Coverage (4)
- Transaction Management Software (2)
- Customer Success (1)
- Office Tenants (1)
- November 2024 (2)
- October 2024 (4)
- September 2024 (2)
- August 2024 (5)
- July 2024 (3)
- June 2024 (3)
- May 2024 (4)
- April 2024 (1)
- February 2024 (1)
- December 2023 (4)
- November 2023 (6)
- October 2023 (4)
- September 2023 (2)
- August 2023 (2)
- July 2023 (3)
- May 2023 (2)
- March 2023 (1)
- February 2023 (3)
- January 2023 (1)
- December 2022 (3)
- November 2022 (4)
- October 2022 (4)
- September 2022 (1)
- August 2022 (4)
- June 2022 (1)
- May 2022 (4)
- April 2022 (8)
- March 2022 (3)
- February 2022 (1)
- January 2022 (2)
- November 2021 (2)
- October 2021 (2)
- September 2021 (3)
- August 2021 (15)
- July 2021 (3)
- June 2021 (1)
- May 2021 (1)
- April 2021 (3)
- March 2021 (1)
- January 2021 (1)
- December 2020 (3)
- November 2020 (1)
- October 2020 (2)
- September 2020 (2)
- August 2020 (3)
- July 2020 (2)
- June 2020 (3)
- May 2020 (1)
- April 2020 (1)
- March 2020 (1)
- February 2020 (1)
- December 2019 (1)
- October 2019 (1)
- September 2019 (2)
- August 2019 (3)
- July 2019 (2)
- April 2019 (69)
- October 2018 (1)
- August 2018 (1)
- July 2018 (1)
- June 2018 (1)
- May 2018 (1)
- April 2018 (2)
- March 2018 (3)
- February 2018 (2)
- December 2017 (1)
- August 2017 (3)
- June 2017 (2)
- May 2017 (2)
- April 2017 (1)
- March 2017 (2)
- January 2017 (2)
- November 2016 (2)
- July 2016 (1)
- June 2016 (1)
- July 2015 (1)
- March 2015 (1)
- June 2014 (1)
- April 2014 (11)
- October 2011 (1)
You May Also Like
These Related Stories