This free, guided checker walks your finance team through the key decision points for ASC 842 Identifying Embedded Leases. Answer a few questions to see the likely treatment and the evidence to document.
Answer a few quick questions below. It is private - nothing is submitted or stored - and takes about a minute.
This tool is a high-level US GAAP screening aid for general information only and is not accounting, audit or legal advice. Conclusions require entity-specific evidence and judgement - confirm the treatment with your advisor.
Here is what the checker asks and why each step matters. Prefer to talk it through? Contact us and we will help directly.
An identified asset can be explicitly specified in the contract or implicitly specified when it is made available for use (ASC 842-10-15-9). Look past the contract's title to how the supplier will actually perform: dedicated equipment placed at your site is often an implicitly identified asset even if the agreement is labeled a service contract. The overall decision flow in this checker mirrors the flowchart in ASC 842-10-55-1.
Without an identified asset the arrangement cannot contain a lease (ASC 842-10-15-9).
Official guidance: FASB Accounting Standards Codification
A capacity portion of an asset is an identified asset only if it is physically distinct. A share that is not physically distinct qualifies only when it represents substantially all of the asset's capacity, so the customer effectively obtains substantially all of the economic benefits from use (ASC 842-10-15-16). Map the contracted quantity against the asset's total capability before answering.
A capacity portion that is not physically distinct and is less than substantially all of the asset's capacity is not an identified asset (ASC 842-10-15-16).
Official guidance: FASB Accounting Standards Codification
A substitution right is substantive only if the supplier has the practical ability to substitute alternative assets throughout the period of use and would benefit economically from doing so (ASC 842-10-15-10). Rights or obligations to substitute for repairs, maintenance, or technical upgrades do not preclude an identified asset, and if the customer cannot readily determine whether the right is substantive, the customer presumes it is not.
A substantive substitution right means there is no identified asset, so the arrangement does not contain a lease (ASC 842-10-15-10).
Official guidance: FASB Accounting Standards Codification
Economic benefits from use include the asset's primary output, byproducts, and other benefits that could be realized from a commercial transaction, such as renewable energy credits generated by using the asset (ASC 842-10-15-17). Amounts the customer pays the supplier that are computed from the asset's output are still benefits the customer obtains; they are treated as consideration for the right of use, not as benefits retained by the supplier (ASC 842-10-15-19).
Without the right to substantially all of the economic benefits from use, the customer does not control the use of the asset and the arrangement is not a lease (ASC 842-10-15-17).
Official guidance: FASB Accounting Standards Codification
Focus on the decision rights that most affect the economic benefits derived from use: the type of output, when it is produced, where it is produced, and whether and how much is produced (ASC 842-10-15-20 through 15-26). Rights limited to operating or maintaining the asset do not by themselves convey the right to direct its use - an operator can run an asset whose use the customer directs.
Because the supplier directs how and for what purpose the asset is used, the customer does not control the use and the arrangement is not a lease (ASC 842-10-15-20).
Official guidance: FASB Accounting Standards Codification
When how and for what purpose the asset is used is predetermined, the customer can still direct the use if it holds the operating rights or if its design of the asset locked in that use (ASC 842-10-15-20(b)). This test frequently decides build-to-suit power purchase, tolling, and dedicated contract-manufacturing arrangements where the output terms are fixed at signing.
With predetermined use and neither operating rights nor a determinative design role, the customer does not direct the use and the arrangement is not a lease (ASC 842-10-15-20(b)).
Official guidance: FASB Accounting Standards Codification
Terms designed to protect the supplier's interest in the asset, its personnel, or its regulatory compliance typically define the scope of the customer's right of use without preventing the customer from directing that use (ASC 842-10-15-20 through 15-26). Distinguish protective limits - a usage cap, mandated maintenance windows, required certifications - from genuine decision rights over what the asset does and for whom.
Supplier decision rights that go beyond protective terms mean the customer does not direct the use, so the arrangement is not a lease (ASC 842-10-15-20 through 15-26).
Official guidance: FASB Accounting Standards Codification
Identify the separate lease components and the nonlease components first: activities that do not transfer a good or service to the customer, such as administrative tasks or reimbursement of the lessor's costs, are not components at all (ASC 842-10-15-30). Then select the allocation approach - relative standalone price allocation, or for lessees, the class-of-asset practical expedient to combine (ASC 842-10-15-37).
Separate the components and allocate the consideration on a relative standalone price basis (ASC 842-10-15-28 through 15-32). Account for the combined lease and nonlease components as a single lease component under the practical expedient (ASC 842-10-15-37). With no nonlease component, the entire consideration is allocated to the lease component (ASC 842-10-15-30).
Official guidance: FASB Accounting Standards Codification
Send us your situation and one of our senior CPAs will review it with you - fixed fee, no surprises.
Contact Us