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Scope

Question 2-3

Should a lessee include property taxes and insurance-related payments made directly by the lessee for
the lease asset in the computation of contract consideration to be allocated to components of the
contract?

PwC Response
It depends. If a lessee is required to incur payments for property taxes and insurance, it does not
matter whether the lessee directly pays a third party on the lessor’s behalf or reimburses the lessor.
Inclusion of payments made by a lessee for property taxes and insurance in contract consideration will
depend on whether the lessee is required to pay a fixed or variable amount.

If a lessee is required to pay a fixed amount of property taxes and insurance (related to the leased
asset), such payments should be included in contract consideration and allocated to the lease and
nonlease components by both the lessee and lessor. If a lessee is required to pay the actual amounts
for property taxes and insurance (i.e., a variable amount rather than fixed payments) such payments
should be excluded from contract consideration and instead recorded as incurred by the lessee and
earned by the lessor. When recorded, the variable amounts would be allocated to the lease and
nonlease components on the same basis as the initial allocation of contract consideration.

2.4.5.1 Practical expedient for lessees

A lessee may elect an accounting policy, by asset class, to include both the lease and nonlease
components as a single component and account for it as a lease. Making this election relieves the
lessee of the obligation to allocate contract consideration to the lease and nonlease components,
although it will increase the total lease liability to be recorded on its balance sheet. Refer to LG 10 for
further discussion of applying this practical expedient during transition.

2.4.6 Allocation of variable consideration

The allocation models for variable consideration are intended to incorporate the allocation concepts in
ASC 606 while preserving the accounting model applicable to variable lease payments in ASC 842. The
key difference between the two models is that variable payments, other than those that depend on an
index or rate, are recognized under ASC 842 only as they are earned. In contrast, variable
consideration under ASC 606 is estimated (subject to constraint) and included in the initial allocation
of consideration. The discussion below highlights how to deal with this difference when an
arrangement includes lease and nonlease components.

As discussed in LG 2.4.1, before determining how to allocate consideration, it is important for lessees
and lessors to identify the contract components. Variable consideration for costs that are not contract
components (e.g., real estate taxes, insurance) are excluded from total consideration and would be
recorded as incurred by the lessee and earned by the lessor. In August 2018, the FASB issued an
exposure draft related to the new leases guidance. One of the proposed updates clarifies the guidance
in ASC 842-10-15-40 for the accounting by lessors for variable payments that relate to both a lease and
a nonlease component. The proposed amendment would require lessors to allocate certain variable
payments to the lease and nonlease components when the changes in facts and circumstances on
which the variable payment is based occur. After the allocation, the amount of variable payments
allocated to the lease component would be recognized in profit or loss in accordance with the leases

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