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.
- Building payment
- Tenant services
- The practical expedient not to separate
- Standalone observable price
- Allocation for gross and net leases
Separating Lease and Non-Lease Components
Under the new standards, when reporting a lease, companies have the option of choosing whether or not to separate out lease and non-lease components by asset class. There are pros and cons associated with separating the components.
The main benefit of electing the expedient not to separate the components is that it will greatly reduce the burden of maintaining compliance. While at first glance it may seem simple to allocate the costs listed in the contract to the separate components, in actuality it’s more complex. Under the new standard, allocation is not based on the cash paid for a component, but rather on the standalone observable price. Tracking down the standalone observable price is expected to be challenging, and for some asset classes, it may not be worth the effort. In those cases, there’s a strong argument for electing the expedient. However, there are also some drawbacks.
Also Check Out
Understand the differences in organizational models, business processes, and systems for real estate and equipment.
The Evaluation Guide includes a comprehensive checklist of features for real estate and equipment lease accounting and administration.