CPE ARTICLE
Embedded Components in Lease and Non-Lease Arrangements By Josef Rashty CURRICULUM: Accounting and Auditing LEVEL: Intermediate DESIGNED FOR: CPAs in industry and public practice OBJECTIVES: To provide an analytical review of embedded transactions in lease and non-lease arrangements and a general framework that CPAs can reference to research the complexity of the issues involved in an emblematical lease transaction KEY TOPICS: Latest guidance from the Financial Accounting Standards Board; multiple arrangements as a single contract; related party arrangements; embedded derivatives; lease, nonlease and not contract components; and lessor and lessee accounting PREREQUISITES: None ADVANCED PREPARATION: None
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his article provides an analytical review of embedded transactions in lease and nonlease arrangements based on ASC 842, Leases; ASU 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors; and ASU 2018-11, Leases (Topic 842): Targeted Improvements. There is significant management judgment involved to identify lease and non-lease components of an arrangement, and lessees and lessors may need to probe the nature of an arrangement and often rely on other standards to properly account for them.
Latest Guidance In July 2018, the Financial Accounting Standards Board (FASB) issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, that provides guidance for separating lease and non-lease components in a contract and allocates the contract consideration into separate components. This ASU provides companies with an additional (and optional) practical expedient transition method to adopt the new lease standard. In December 2018, FASB issued ASU 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors, that requires lessors to analyze sales taxes and other similar taxes on Today's CPA May / June 2021 35
