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Scope

2.1 Chapter overview

A leasing arrangement conveys the use of an asset from one party to another without transferring
ownership. The leasing arrangement may take various forms. Some arrangements are clearly within
the scope of lease accounting, for example, a legal form lease that provides an explicit contractual right
to use a building for a specified period of time in exchange for consideration. However, the right to use
an asset can also be conveyed through arrangements that are not leases in legal form. For example, a
hospital may execute an arrangement to purchase consumables and services from a vendor through an
arrangement that entitles the hospital to receive free medical equipment for a period of time. Although
not a lease in legal form, the rights to the medical equipment may be within the scope of lease
accounting.

ASC 842, Leases, identifies arrangements that are to be accounted for as leases. This chapter discusses
how to identify which arrangements, or components within an arrangement, should be accounted for
under ASC 842. ASC 842 specifically excludes arrangements for the right to use a natural resource and
arrangements that transfer the right to use certain assets other than property, plant, or equipment
from its scope. See LG 2.2 for additional information on the scope of ASC 842.

This chapter also discusses how to identify the components to be evaluated for lease accounting and
how to differentiate the lease and nonlease components.

Arrangements with a special purpose entity that contain a lease may require the lessee to consolidate
the special purpose entity under the variable interest entity model. See CG 2 for additional
information.

2.2 Exceptions to applying lease accounting

A reporting entity should consider the application of lease accounting in ASC 842 to all arrangements
that meet the definition of a lease, as discussed in LG 2.3, with the exception of the following:

□ Leases of intangible assets subject to ASC 350

□ Leases to explore for or use minerals, oil, natural gas, and similar nonregenerative resources
subject to the guidance contained in ASC 930 and ASC 932.

□ Leases of biological assets (such as plants and animals)

□ Leases of inventory

□ Leases of assets under construction

ASC 350 defines intangible assets as “assets (not including financial assets) that lack physical
substance.” ASC 805-20-55-37 indicates that air use rights are an example of a contract-based
intangible asset. Many arrangements that provide subsurface rights (i.e., rights to use space below the
earth’s surface) are similar to air use rights. We believe rights to any spaces that cannot be inhabited or
accessed by human beings, such as air rights or rights to construct a pipeline underground, lack
physical substance and thus could be accounted for as intangible assets outside the scope of ASC 842.

The ASC 842 Glossary discusses the items subject to the leases of inventory exclusion.

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