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Lease classification

ASC 842-10-30-5 lists the six types of lease payments to be included in the measurement of aggregate
lease payments used for lease classification purposes.

ASC 842-10-30-5
At the commencement date, the lease payments shall consist of the following payments relating to the
use of the underlying asset during the lease term:

a. Fixed payments, including in substance fixed payments, less any lease incentives paid or payable
to the lessee (see paragraphs 842-10-55-30 through 55-31).

b. Variable lease payments that depend on an index or a rate (such as the Consumer Price Index or a
market interest rate), initially measured using the index or rate at the commencement date.

c. The exercise price of an option to purchase the underlying asset if the lessee is reasonably certain
to exercise that option (assessed considering the factors in paragraph 842-10-55-26).

d. Payments for penalties for terminating the lease if the lease term (as determined in accordance
with paragraph 842-10-30-1) reflects the lessee exercising an option to terminate the lease.

e. Fees paid by the lessee to the owners of a special-purpose entity for structuring the transaction.
However, such fees shall not be included in the fair value of the underlying asset for purposes of
applying paragraph 842-10-25-2(d).

f. For a lessee only, amounts probable of being owed by the lessee under residual value guarantees
(see paragraphs 842-10-55-34 through 55-36).

If a lease includes nonlease components, they should be separated and excluded for purposes of lease
classification, unless a lessee makes an accounting policy election not to separate nonlease
components for the particular asset class. See LG 2.4 for information on multiple element
arrangements and the allocation of consideration to lease and nonlease components.

Question 3-8

Are the costs associated with removing leasehold improvements installed by the lessee (i.e., a lessee’s
obligation to return an underlying asset to its original condition) considered lease payments?

PwC response
No. The costs associated with a lessee’s obligation to return an underlying asset to its original
condition generally would not meet the definition of a lease payment (defined in ASC 842-10-30-5),
and should not be included in the measurement of the lessee’s lease liability. Since the costs are
associated with removing the lessee’s owned assets, these costs should be accounted for using the
guidance in ASC 410, Asset Retirement and Environmental Obligations.

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