How to separate the components of a lease contract

Account for each component

• An entity should account for each lease component as a lease separately from non-lease components of the contract, unless the entity applies the practical expedient guidance
• An entity should assess whether a contract contains a lease for each potential separate lease component.

Determining the separate component

The right to use an underlying asset is a separate lease component if both:

1. the lessee can benefit from use of the underlying asset either on its own or together with other resources that are readily available to the lessee.
2. Readily available resources are goods or services that are sold or leased separately (by the lessor or other suppliers) or resources that the lessee has already obtained (from the lessor or from other transactions or events); and
3. the underlying asset is neither highly dependent on, nor highly interrelated with, the other underlying assets in the contract.

• Test: If a lessee could decide not to lease the underlying asset without significantly affecting its right to use other underlying assets in the contract might indicate that the underlying asset is not highly dependent on, or highly interrelated with, those other underlying assets.

Other amounts payable

• A contract may include an amount payable by the lessee for activities and costs that do not transfer a good or service to the lessee.
• For example, a lessor may include in the total amount payable a charge for administrative tasks, or other costs it incurs associated with the lease, that do not transfer a good or service to the lessee.
• Such amounts payable do not give rise to a separate component of the contract, but are considered to be part of the total consideration that is allocated to the separately identified components of the contract.

Lessee – stand-alone price

• For a contract that contains a lease component and or non-lease components, a lessee should allocate the consideration in the contract to each lease component on the basis of the relative stand-alone price of the lease component and the aggregate stand-alone price of the non-lease components.
• The relative stand-alone price of lease and non-lease components should be determined on the basis of the price the lessor, or a similar supplier, would charge an entity for that component, or a similar component, separately.
• If an observable stand-alone price is not readily available, the lessee should estimate the stand-alone price, maximising the use of observable information.

Practical expedient:

• A lessee may elect, not to separate non-lease components from lease components, and instead account for each lease component and any associated non-lease components as a single lease component. Should be applied for all underlying assets of the same class.
• A lessee should not apply this practical expedient to embedded derivatives
• Unless the practical expedient is applied, a lessee should account for non-lease components applying other applicable Standards.