Major challenges of the new lease accounting standards

Lease & Non-lease Components

One of the most challenging aspects of the new lease accounting standards is the requirement to separate lease and non-lease components. If you’re familiar with the new standard, you’ll know that there is an optional practical expedient to not separate the components that can be elected by asset class. However, there are some pros and cons to taking the practical expedient that companies should consider before making their decision.

Key Considerations

1. Asset classes

How will you define the asset classes for which you elect the expedient? Keep in mind that the asset class categorization must be kept constant across all accounting standards.

2. Valuation

If you choose not to separate components, how much greater will the right-of-use asset and lease liability be with the addition of non-lease components?

3. Critical variables

If you choose to separate, how will you track critical variables for valuing the components, like standalone observable prices?

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RESOURCES

What the experts think.

IFRS 16 – Lease Components

September 2, 2019 – KPMG covers the separation challenges for lease and non-lease components as well as the different impacts for lessees and lessors, providing practical guidance and examples on identifying and separating the components.

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Separation Anxiety: Lease and Non-Lease Components

June 27, 2017 – It’s important for lessees to understand the pros and cons of separating lease and non-lease components, as well as how to value the components using standalone observable price if they choose to separate.

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New Lease Accounting Standard (ASC 842 and IFRS 16): CAM and Taxes

June 27, 2017 – GAAP Dynamics discusses how FASB defines lease and non-lease components as well as what classifies as a non-component under the new lease accounting standard.

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