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Scope

ASC 842-10-15-3

A contract is or contains a lease if the contract conveys the right to control the use of identified
property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.
A period of time may be described in terms of the amount of use of an identified asset (for example,
the number of production units that an item of equipment will be used to produce).

A lease conveys the right to use an identified asset for a period of time. Arrangements that are truly
perpetual in nature would not meet the definition of a lease because there is no defined period of use.
These arrangements are more akin to acquiring an asset, and therefore, would be outside the scope of
ASC 842.

Reporting entities may need to consider if certain arrangements are truly perpetual in nature. “Pay as
you go” arrangements may provide the right to use an asset indefinitely. However, if the arrangement
can be terminated by the customer at any time by merely stopping payment, the perpetual provision
may not be substantive, and entities would need to evaluate the lease term. See LG 3.3.3.1 for
information on determining the term of a lease.

The right to control the use of an asset may not necessarily be documented, in form, as a lease
agreement. Often, the right to use an identified asset is embedded in an arrangement that may appear
to be a supply arrangement or service contract. Therefore, a reporting entity should consider all of the
terms of an arrangement to determine whether it contains a lease.

When performing the analysis to determine if an arrangement contains an embedded lease, multiple
arrangements may be considered to be a single transaction. If two or more arrangements are entered
into at the same time, a reporting entity should consider whether the analysis should be performed on
each contract or the combination of contracts. ASC 842-10-25-19 specifies the criteria to consider in
making this determination.

ASC 842-10-25-19
An entity shall combine two or more contracts, at least one of which is or contains a lease, entered into
at or near the same time with the same counterparty (or related parties) and consider the contracts as
a single transaction if any of the following criteria are met:

a. The contracts are negotiated as a package with the same commercial objective(s).

b. The amount of consideration to be paid in one contract depends on the price or performance of the
other contract.

c. The rights to use underlying assets conveyed in the contracts (or some of the rights of use
conveyed in the contracts) are a single lease component in accordance with paragraph 842-10-15-
28.

If a combination of contracts is determined to contain a lease, the same combined transaction should
be used for purposes of lease classification, recognition and measurement in accordance with the
guidance in ASC 842.

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