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Scope

Analysis

There are three components in the arrangement – the building assets (office and HVAC), the office
furniture, and the maintenance agreement.

The office and HVAC system are one lease component because they cannot function independently of
each other. The HVAC system was designed and tailored specifically to be integrated into the office
building and cannot be removed and used in another building without incurring substantial costs.
These building assets are a lease component because they are identified assets for which Customer
Corp directs the use.

The office furniture functions independently and can be used on its own. It is also a lease component
because it is a group of distinct assets for which Customer Corp directs the use.

The maintenance agreement is a nonlease component because it is a contract for service and not for
the use of a specified asset.

To properly account for the lease components, Customer Corp will need to determine the standalone
selling price of the use of the building assets, the office furniture, and the maintenance services. If the
sum of the standalone selling prices exceeds the monthly payment, the implicit discount provided for
bundling the three components should be allocated between the service and the lease elements based
on the relative standalone selling prices.

2.5.1 Portfolio exception

A reporting entity may elect to utilize a portfolio approach, under which it does not have to consider
the lease components to apply lease accounting. Lessees and lessors may use the portfolio approach
for leases provided its application does not create a material difference when compared to accounting
for leases at the contract level. In addition to the materiality restriction, we would expect that a
reporting entity that applies the exception would be able to demonstrate that the leases being grouped
have similar characteristics. The leases should have comparable conditions regarding such clauses as
default, extensions, purchase options, and lease term. Common examples of leases that may meet this
criteria are office equipment (copiers, computers, phone systems with multiple handsets, etc.) or
vehicle fleets that have single start and end dates.

2.5.2 Reallocation of consideration

Under specific circumstances a lessee should reallocate the consideration paid between components as
discussed in ASC 842-10-15-36.

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