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Scope

2.3.1.3 Physically distinct

An identified asset must be physically distinct. A physically distinct asset may be an entire asset or a
portion of an asset. For example, a building is generally considered physically distinct. One floor
within the building may also be considered physically distinct if it can be used independent of the
other floors (e.g., point of entry or exit, access to lavatories). Similarly, the use of a static or electronic
billboard on the facade of a stadium may be considered physically distinct from the use of the stadium
as a whole if the location of the billboard is specified as a condition of the contract. Naming rights to a
sports stadium typically involve co-branding and shared promotion, along with the right for the
sponsoring entity to place its logo on the stadium. These rights are generally considered intangible
assets and are outside the scope of the leasing guidance.

Certain assets may lend themselves to use by more than one party and need to be carefully evaluated
to determine if they are physically distinct. For example, a contract providing the use of a portion that
is less than substantially all of the capacity in a pipeline to transport natural gas is not physically
distinct because it cannot be distinguished from other concurrent users of the pipeline. A portion of an
asset that is not physically distinct is not an identified asset unless it represents substantially all of the
capacity of the asset and thereby provides the customer with the right to obtain substantially all of the
economic benefits from use of the asset. See LG 2.3.2.1 for additional information on evaluating
whether the contract provides substantially all of the economic benefits from use of an asset.

Another example is a tenant that rents one floor in a multi-story office building. The floor of the
building to be used by the individual tenant may be physically distinct. However, the tenant would also
need to consider its right to use the land on which the building is located. While the land on which the
entire building is located is physically distinct, the portion of the land that the tenant has the right to
use, is not physically distinct. A tenant’s right to use a non-physically distinct portion of the land
would be an identified asset only if such right is for substantially all of the capacity of the land. For
example, if the tenant had the right to use nine floors in a ten-story building, it would be reasonable to
conclude that the land in the arrangement is also an identified asset. Provided the other criteria for a
lease were met, the tenant would have a lease of both the building and the land and would need to
evaluate whether they represent separate lease components. In contrast, if the tenant had the right to
use only two floors of the ten story building, it would only have a lease of the building and not of the
underlying land. See LG 2.5 for additional information on identifying components within a lease.

A portion of a pipeline (such as a lateral pipeline) could be physically distinct if an entity can separate
(e.g., through use of a valve) and use the portion of the asset independent of the mainline pipeline.
“Last mile” assets (i.e., the end of a single, contiguous asset) would be evaluated in the same way. If the
last mile is mechanically separable from the remainder of the asset (e.g., there is a switch that permits
an entity to shut off the flow of electricity or signal to a power or telephone line), the asset would be
considered physically distinct.

When thinking about whether an asset is physically distinct, entities may need to consider the nature
of the asset and evaluate how the asset was designed to be used. This evaluation could include the type
of functionality the asset will provide and to what parties it will be provided. For example, consider an
arrangement that conveys the right to use a specific space on a cell phone tower to a customer. The
primary use of the cell tower is to sell or rent space on the tower to cell phone carriers. As a result, the
specific hosting locations on the cell tower are physically distinct.

In contrast, arrangements that provide use of a specific spot on an electric utility pole to a third party
(i.e., a cell phone carrier) generally would not be considered physically distinct. The portion of a utility

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