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Lease classification

Question 3-9

Are the costs a lessee incurs to dismantle and remove an underlying asset at the end of the lease term
considered lease payments?

PwC response
No. These payments are incurred by the lessee to remove the lessor’s assets and consequently they
would be subject to the guidance in ASC 842 (not ASC 410). These costs would generally be considered
variable lease payments under ASC 842.

Question 3-10

Should lease payments include nonmonetary consideration (e.g., common stock of a lessee)?

PwC response
Generally, yes. We believe noncash consideration should be included in lease payments, measured at
fair value on the lease commencement date. However, there are certain forms of noncash
consideration that are explicitly excluded from lease payments, such as a lessee’s guarantee of a
lessor’s debt.

Question 3-11

Should lease payments include deposits paid by a lessee to a lessor?

PwC response
It depends. Provisions in a lease agreement commonly require a lessee to pay a deposit to a lessor at or
before the lease commencement date to financially protect the lessor in the event the lessee damages
or does not properly maintain the underlying asset. If the asset is not damaged and is properly
maintained, the lessor is required to reimburse the lessee for the full amount of the deposit at the end
of the lease.

If a deposit paid by a lessee to a lessor is refundable, we do not believe the deposit is a lease payment.
Rather, the payment should be accounted for as a deposit asset and liability by a lessee and lessor,
respectively. Deposits should be evaluated to determine whether it is probable all or a portion of the
deposit will be returned to the lessee at or before the end of the lease term. When an amount on
deposit is less than probable of being returned to the lessee, it should be recognized in the same
manner as a variable lease payment (i.e., a period cost).

If a deposit paid by a lessee to a lessor is nonrefundable, we believe the deposit is a lease payment. For
example, if a lessee is required to pay a lessor a deposit at or before the lease commencement date to
demonstrate its commitment to lease the underlying asset, the deposit should be accounted for as a
fixed lease payment.

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