New Lease Accounting Standard: How to Identify Embedded Leases

The New Lease Accounting Standard Checklist: How to Identify Embedded Leases

While embedded leases are not a new concept in accounting, they are now receiving a lot more attention. In the past, operating leases weren’t recorded on the balance sheet, so embedded leases were generally ignored. This practice is changing thanks to the new lease accounting standard.

Determining whether a contract contains an embedded lease can be difficult and time-consuming, particularly for those not as well-versed in lease accounting guidelines.

What is an embedded lease?

An embedded lease occurs when an organization has a contract with a vendor that uses an asset as part of the value provided and the use of that asset meets the definition of a lease.

The new lease standard (ASC 842) requires that organizations record all leases on the balance sheet to more fully reflect the company’s assets and liabilities.

The first step to implementing the new standard is for organizations to conduct an inventory of all their current leases, which includes any leases that may be embedded within service contracts.

Learn more about embedded leases and the new lease accounting standard:

Public companies have had to comply with the new lease standard on lease accounting since the beginning of 2019. Analysis of their preparation successes and challenges provides critical ASC 842 lessons for private companies approaching a 2022 deadline.

Register here for ProNexus’ upcoming on-demand webinar where we will adress some lessons learned when implementing and maintaining the new lease accounting standard, such as:

• Finding leases is not straightforward.
• Required lease data can be a challenge to abstract, migrate, and maintain.
• Systems and processes may require more attention than expected – or desired.
• The incremental borrowing rate is a complex issue.
• Spread the word early about implementation.