Integrated leases are leases that are included in larger agreements. Would you rather read this article in PDF format? Download Identify integrated leases: are leases hidden in your contracts? The devil is in the details. Determining whether a contract gives the client the right to control the identified assets requires a careful analysis of the facts and circumstances of the agreement and the nature of the assets. The following indicators can help companies assess the potential of leases built into their contracts. Integrated leases are a new concept for many people. While companies would still have to disclose all leases, in the past, operating leases – which will likely be most integrated leases – were not recorded on the balance sheet and therefore received less attention. 1. Does the agreement involve the use of one or more specific assets? If no assets are specified, there can be no lease in the contract. However, if an asset is explicitly or implicitly identified in an agreement, a lease may exist. Of course, I`ve heard the term « integrated leases » before, but I didn`t remember seeing it in the standard.
I searched for the term in the FASB accounting standards. Nothing. Desperately, I searched for each of the 4 great guides on this topic. Again, nothing. An integrated lease, a term that is not defined in either ASC 842 or IFRS 16, refers to the elements of a contract that identify which assets can be used and controlled, and how. Two important points help explain why these components are the source of uncertainty for many organizations. First, they are not part of the standard lease identification processes for many groups. Second, under the new leasing standards, companies are exposed to reprocessing and internal control risks if they do not identify and consider contracts with integrated lease elements. An integrated lease is a lease that exists in a contract. A lease is defined as a contract that transfers the right to control the identified asset for a specified period of time in exchange for consideration.
For valuation purposes, two of the most important elements of this definition must be taken into account, namely whether the contract contains an identified asset and whether the right to « control » that asset is determined by the lessee. Since the lease is built into another contract, it is quite common for these agreements not to be accounted for as leases in the past, especially if the contract management was managed within a department/AP rather than being reviewed by the accounting department. Properly identifying integrated leases can feel like a treasure hunt, and many companies don`t realize that service contracts often include integrated leases. Companies applying the provisions of CSA 842 must evaluate new contracts to identify potential integrated leases. Some common types of contracts that may include integrated leases include agreements for: GASB 87 allows the substitution of an asset and the contract remains a lease. Under GASB 87, the right of control of the asset is assumed to relate to the service capacity of the underlying asset and, therefore, the substitution of an identical asset maintains the lease. In contrast, U.S. GAAP and IFRS 16 require further analysis to determine the impact of surrogate rights on the lease definition. If the contract gives the supplier the right to replace one asset with another, if it is convenient for the supplier to replace it and the supplier would benefit economically, then the substantial right of substitution means that there is no lease identified, one of the most delicate aspects of the new rental standard is the concept of integrated leases. Like many components of the new standard, identifying an integrated lease requires human judgment – and there are few shortcuts to simplify the process. The definition of a lease under the updated standard does not differ much from that under CSA 840.
And the obligation to seek integrated leases is not new. But the impact on financial statements if a lease under ASC 842 is not properly identified may be greater. In a 2017 KPMG survey to assess progress and highlight issues related to the application of the new lease accounting standards (ASC 842 and IFRS 16), two groups led the way. Respondents said they were most challenged by the process of identifying so-called integrated leases (49%) and selecting and implementing an appropriate leasing system (48%). These concerns underscore the need for companies to install robust processes and implement functional tools to adopt the new leasing standards. IT services: A hospital subject to Health Insurance Portability and Accountability (HIPAA) regulations hires an IT service provider to provide cloud computing services. To ensure that patients` privacy rights are not violated, the contract requires that a dedicated server be used to provide the services. When and how the dedicated server is used, the hospital decides based on its instructions to the IT service provider. The contract contains a built-in lease of the dedicated server. You should make these judgments on a case-by-case basis with the help of your consulting partners.
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