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Scope
Payment type Include in consideration Allocation to components
Other variable payments Not included in consideration When variability is eliminated
at lease commencement for (i.e., payment amount is
initial measurement known), allocate on the same
basis as the initial allocation of
consideration
See LG 2.4.5 and LG 2.4.6.2 for further details on how lessees should apply this guidance.
2.4.4 Lessor allocation of consideration to lease and nonlease components
By satisfying a contract that contains lease and nonlease components, lessors generate revenue.
Therefore, once the contract components have been identified, it is appropriate for lessors to follow
the relevant guidance in ASC 606 to determine how to allocate contractual consideration between the
components. See RR 5 for guidance on this allocation method.
If an arrangement includes variable consideration, the amount of total consideration allocated to the
lease and nonlease components may vary based on the nature of the variable payments and the
components to which they relate. See LG 2.4.6.1 for information.
2.4.4.1 Practical expedient available for lessors
In July 2018, the FASB issued a new practical expedient for lessors. If elected, lessors will be able to
aggregate nonlease components that otherwise would have been accounted for under the new revenue
recognition standard with the associated lease component, if the following conditions are met:
□ The timing and pattern of transfer for the nonlease component and the associated lease
component are the same
□ The stand-alone lease component would be classified as an operating lease if accounted for
separately
If this practical expedient is elected, and the nonlease component is aggregated with the associated
lease component, the lessor would account for the combined component as follows:
□ If the nonlease components are the predominant characteristic, account for the combined
component under the new revenue standard. In doing so, the lessor would (a) recognize revenue
consistent with the method assessed when applying the “timing and pattern of transfer” criterion
to use the expedient and (b) account for all variable payments, including those related to the lease,
under the revenue guidance.
□ If the nonlease components are not the predominant characteristic, account for the combined
component as an operating lease under the new leases standard. All variable payments, including
those related to any good or service, would be accounted for as variable lease payments.
Lessors will need to apply judgment to determine the predominant characteristic of the combined
component. If elected, the practical expedient will need to be applied to all contracts that qualify for
the practical expedient as of the date of the election.
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