Lease components - KPMG Global (2024)

FAQs

What are examples of lease components? ›

Facts and Circ*mstances: An entity leases a facility, which includes a building, land, and three pieces of equipment. The building, land, and all three pieces of equipment are considered separate lease components because they meet the above criteria to be treated and accounted for separately.

The lease component is the unit of account for lease accounting. Lessors and lessees need to identify, and generally separate, lease and non-lease components to apply the new standard. To do this, they need to allocate the consideration in the contract between the components that they account for separately.

Handling Multiple Lease Components

In this context, those resources are goods or services that can be obtained separately or has already been transferred to the customer, either by the lessor or another supplier.

The lease term cannot exceed the period for which the lease is enforceable. IFRS 16 Leases paragraph B34 says that “A lease is no longer enforceable when the lessee and the lessor each has the right to terminate the lease without permission from the other party with no more than an insignificant penalty.”

Non-lease components represent the purchase of other goods or services, like common area maintenance, parking and security. Executory costs, like taxes and insurance, are not considered components because they don't involve the delivery of a good or service to the lessee.

​ Parking is another nonlease component. Another example of a nonlease component is a service contract where a truck is operated on behalf of a lessee.

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

Separate lease components

The guidance on what constitutes a separate lease component is the same for lessees and lessors. – the asset is neither highly dependent on, nor highly inter-related with, the other assets in the contract. A contract with multiple leases may contain one or many separate lease components.

A percentage lease has two components — base rent (or minimum rent) and a percentage of the monthly or annual gross sales made on the premises.

An ROU asset is an intangible asset that measures the valuation gained by the lessee through their ability to use an asset during a particular period of time. Common ROU assets fall under PP&E, or property, plant, and equipment.

What is the full standard of IFRS 16 leases? ›

IFRS 16 specifies how an IFRS reporter will recognise, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value.

An operating lease is a contract that permits the use of an asset without transferring the ownership rights of said asset. A finance lease is a contract that permits the use of an asset and transfers ownership after the lease period is complete, and the lessor meets all other contract obligations.

Leases can involve all kinds of assets, from property, such as office buildings, to equipment, such as computers, cars, trucks and factory machinery. A lease contract documents key terms for each lease and is signed by both parties: the lessor and the lessee.

In most cases, the lease agreement will outline the terms of the renter's tenancy, including the length of time they're renting, the upfront fees they'll pay, the monthly rental amount, and the rules and regulations governing the property's use.

For the sake of lease rate factor calculation, suppose an equipment cost $10,000 has a lease rate factor of . 0260, which means a monthly payment of (10,000 *. 0260) = $260. It means that the lessee must pay $260 for leasing the equipment in consideration of the required number of periods, which is set in the lease.