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Introduction

□ Whether there is an identified asset

□ Whether the contract conveys the right to control the use of the identified asset in exchange for
consideration for a period of time

Often, it may be easy to determine that an arrangement contains a lease. Other times, it may be
difficult to distinguish between a lease and an arrangement to buy or sell goods or services. See LG 2
for information on evaluating whether an arrangement is a lease.

The leases standard does not require lessees to apply the guidance to arrangements with a lease term
of 12 months or less. See LG 2.2.1 for additional information on this short-term lease measurement
and recognition exemption. In addition, certain arrangements are outside the scope of the leases
standard, including:

□ Leases of inventory or of construction in progress

□ Leases of intangible assets, including licenses of internal-use software

□ Leases to explore for or use natural resources

□ Leases of biological assets

□ Service concession arrangements within the scope of ASC 853, Service Concession Arrangements

As discussed in LG 7, ASC 842 does not recognize a leveraged lease. Lessors should continue to
account for leveraged leases existing at the application date of the leases standard using the guidance
in ASC 840, Leases.

1.2.2 Lessee classification

As noted earlier, the FASB decided on a dual model, under which different types of leases have
different accounting treatment subsequent to the initial recognition of leased assets and liabilities. The
principal distinction between the two types of leases is in the resulting income statement recognition.
As discussed in LG 4, a lessee with a finance lease is required to apply a financing model in which the
expense resulting from the lease declines during the lease term. Operating leases, on the other hand,
result in lease expense recognized on a straight-line basis, by amortizing the leased asset more slowly
than a finance leased asset.

1.2.3 Lessor classification

Lessors are also required to classify leases. Sales-type and direct financing leases are recognized by a
lessor as lease receivables, with interest income that is typically front-loaded (i.e., income per period
declines during the lease term). The distinction between a sales-type and a direct financing lease is
that in a sales-type lease, the lessee obtains control of the underlying asset and the lessor recognizes
selling profit and sales revenue upon lease commencement. In order to align lessor accounting with
the principles in the revenue recognition guidance in ASC 606, a lessor is precluded from recognizing
selling profit or sales revenue at lease commencement for a lease that does not transfer control of the
underlying asset to the lessee.

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