Split Conditional Field Lease For Free

The two most common types of leases are operating leases and financing leases (also called capital leases).

A lease will be recorded on the balance sheet as a right-of-use (ROU) asset and lease liability. The lease liability is the payment obligation over the term of the lease contract, while the ROU asset represents the control of the asset under the lease contract.

The lessee shall allocate the consideration in the contract on a relative standalone price basis to the separate lease components and the nonlease components of the contract. Initial direct costs should be allocated to the separate lease components on the same basis as the lease payments.

The lessor reports the lease as a leased asset on the balance sheet and individual lease payments as income on the income and cash flow statements. The lessee reports the lease as both an asset and a liability on the balance sheet due to their stake as a potential owner of the asset and their required payment.

Generally, a government should account for the lease and non-lease components of a lease as separate contracts. If a lease involves multiple underlying assets, lessees and lessors in certain cases should account for each underlying asset as a separate lease contract.

You determine if a lease has separate lease components by considering the interdependencies of individual assets covered in a contract. A key consideration is whether the supplier will use multiple assets, or a group of assets that work together, to fulfill the arrangement.

FASB ASC 842-10-15-37 provides a practical expedient to combine lease and non-lease components and treat the combined component as a lease component (practical expedient) which may be elected by underlying class of assets.

From a lease accounting perspective, a capital lease is treated as if the lessee has purchased the asset using debt financing. The asset and the associated lease liability are recorded on the lessee's balance sheet. Each lease payment is allocated between the reduction of the lease liability and interest expense.

A lessee may elect to include both the lease and nonlease components as a single component, by asset class, and account for it as a lease.

It is not always possible or desirable for an agreement for lease to be unconditional. Often, there is a need for an agreement for lease where the ultimate grant of the lease is conditional upon certain conditions being satisfied.