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.12 ASC 840, Leases
Most of the authoritative guidance related to accounting for leases can be found in ASC 840. ASC 840 provides comprehensive standards of financial accounting and reporting for leases by both lessees and lessors. ASC 840 intends that a lessee should capitalize any "...lease that transfers substantially all of the benefits and risks incident to the ownership of property..." (ASC 840-10-10-1). However, ASC 840 establishes certain criteria to identify such leases, and it is generally acknowledged that a lease can avoid capitalization under those criteria even if it transfers substantially all the risks and rewards of ownership to the lessee. Lease structuring by the lessee typically entails an exercise in determining that none of the lease classification criteria in ASC 840-10-25-1 have been met.
Exclusions – Specifically excluded from the scope of ASC 840 are licensing agreements for items such as software, films, plays, manuscripts, patents and copyrights, as well as lease agreements relating to the rights to explore or exploit natural resources. ASC 840 applies only to contracts that convey the right to use land and/or depreciable assets. Therefore, intangibles (such as motion picture rights), inventory, works of art, and precious metals are also outside the scope of ASC 840.
ASC 985-20 addresses the accounting by lessors for leases of computer equipment and software, concluding that the equipment should be accounted for pursuant to ASC 840 and the software should be accounted for in conformity with ASC 985-20.
ASC 350-40-25-16 specifies that a company acquiring software under a licensing or leasing agreement should account for the transaction by analogy to ASC 840, notwithstanding the fact that, technically, ASC 840 excludes intangible assets from its scope. In April 2015, the FASB issued ASU 2015-05, which superseded ASC 350-40-25-16, thus eliminating the requirement to account for software licenses by analogy to ASC 840. Under the ASU, if a customer is obtaining a software license, it should account for that license consistently with the acquisition of any other license of an intangible asset. This ASU is effective for fiscal years beginning after December 15, 2015, and early adoption is permitted.
ASC 853 addresses the accounting for service concession arrangements. ASC 853-10-25-2 specifies that arrangements within the scope of that Topic are excluded from the scope of ASC 840. The guidance in ASC 853 was issued in December 2014 and was applicable for annual periods beginning after December 15, 2014 and quarterly periods after December 15, 2015.
Regulated enterprises – For discussion on leases and regulated enterprises refer to UP, PwC's Accounting and financial reporting guide for Utilities and power companies.
Lease brokers – The applicability of ASC 840 extends to third-party intermediaries between lessors and lessees who, while not being lessors or lessees, may (1) assume various risks related to the lease transaction, (2) receive fees, and (3) receive benefits in addition to fees. When the lease broker's participation is so great and the lease broker does not appear to be functioning merely as an intermediary, but more as a lessor or a lessee, it would generally be appropriate for the broker to follow ASC 840 accounting.
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