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Scope

Examples 2-15, Example 2-16 and Example 2-17 illustrate how to allocate variable consideration
between lease and nonlease components. Following the examples, Figure 2-7 summarizes the key
distinctions between the facts and conclusions in each example.

EXAMPLE 2-15
Allocating variable consideration – contract for sale of medical equipment and consulting services
(sales-type lease)

Customer Co, a medical facility, contracts with Supplier Corp to lease specialized medical equipment
over a five-year period. Prior to leasing the specialized medical equipment from Supplier Corp,
Customer Co treated 5,000 patients per year using an older version of the equipment. Supplier Corp
asserts that the new medical equipment is more efficient than the older version and will allow
Customer Co to treat additional patients.

Supplier Corp will also provide consulting services to assist Customer Co with optimizing operations
and reducing inefficiencies at its medical facility. Supplier Corp believes that the consulting services
will both reduce costs and further increase the number of patients Customer Co can treat using the
new equipment. The number of hours Supplier Corp will provide each year as part of these consulting
services is fixed at inception of the contract.

The parties agree that Customer Co will make fixed annual payments of $400,000 and will make an
incremental payment based on the number of patients treated using the new equipment. Specifically,
for each patient treated in excess of an established threshold of 6,000 per year, Customer Co will make
an incremental payment to Supplier Corp of $100 per patient.

Supplier Corp believes that Customer Co will treat 7,000 patients each year, and therefore will be
required to make an incremental payment of $100,000 (1,000 patients in excess of threshold × $100
per patient) per year. Total expected annual payments are $500,000 ($400,000 fixed + $100,000
variable).

Supplier Corp expects that even without the consulting services, Customer Co would realize a
significant increase in the number of patients it could treat as a result of the new, more efficient
equipment and would be required to make at least part of the incremental payment.

The medical equipment has a useful life of five years and is not expected to have a residual value at the
end of the lease term. The lease of the medical equipment is a sales-type lease since the lease term is
for a major part of the useful life of the asset.

The standalone selling price of the equipment is $2,000,000 (cost basis of $1,900,000) and the
standalone selling price for the consulting services is estimated to be $26,000 per year.

In the first year of the arrangement, Customer Co treats 7,000 patients using the new equipment.

How should Supplier Corp account for this arrangement at lease commencement and in the first year?

Analysis

The equipment lease and consulting services are separate lease and nonlease components,
respectively. The variable payments do not depend on an index or rate. In addition, Supplier Corp

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