Lease agreements can be complex documents that encompass more than the straightforward right of use for an asset. Both lease and non-lease components may be integrated into the same agreement. Under the new compliance requirements with new ASC 842 and IFRS 16 lease accounting standards, it’s important to identify separate costs associated with the lease and non-lease components of the lease.
Example of lease and non-lease components
A common example of an agreement that includes both lease and non-lease components is a security system. The equipment associated with the security system, such as the cameras and sensors placed on-site, are leased. However, the cost of the monitoring service is a non-lease component included in the same contract.
Another example is a company’s phone system. The telephones placed at each desk and the conference phone placed in meeting rooms are typically leased equipment, while the monthly phone service is a non-lease component included in the same contract.
How lease accounting software can help test lease and non-lease components
A clear list of lease and non-lease components are not included in ASC 842 or IFRS 16. Therefore, the initial determinations require some judgement and companies need clear internal processes to delineate between the two classifications.
The right lease accounting software can help. CoStar lease accounting software offers documentation along with a full list of testing variations.
Lease components tested under ASC 840, 842 and IFRS 16 for:
- With or without escalations
- With or without free rent period
- Payment on first and last day of the month
- Partial first month rent requiring proration
- Renewal options from commencement
- Modified retrospective or transition approach
- Renewal and option exercise
- Mid-term termination
Non-lease components tested for utilities, CAM and insurance, including:
- Annual payments in advance
- Annual payments mid-year requiring accrual and prepaid functionality
- Monthly payments
- CPI and other index driven increases
- Percentage and variable rent