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Lease accounting should be applied at the lowest component. Therefore, after determining the lease and nonlease components, a reporting entity should consider whether the lease contains more than one lease component. This is done by identifying the units of account.
A reporting entity should identify whether the customer is contracting for a number of separate deliverables or contracting for one deliverable that may incorporate a number of different assets. This analysis is similar to the one used to determine a performance obligation in ASC 606. Components of a contract that could be utilized exclusive of the remainder of the contract components should be accounted for separately, as discussed in ASC 842-10-15-28. Both of the criteria discussed in this guidance must be met in order to separate lease components. Note that while these criteria are considered when evaluating multiple lease components, they are not considered when determining whether a lease exists.

ASC 842-10-15-28

After determining that a contract contains a lease in accordance with paragraphs 842-10-15-2 through 15-27, an entity shall identify the separate lease components within the contract. An entity shall consider the right to use an underlying asset to be a separate lease component (that is, separate from any other lease components of the contract) if both of the following criteria are met:
  1. The lessee can benefit from the right of use either on its own or together with other resources that are readily available to the lessee. Readily available resources are goods or services that are sold or leased separately (by the lessor or other suppliers) or resources that the lessee already has obtained (from the lessor or from other transactions or events).
  2. The right of use is neither highly dependent on nor highly interrelated with the other right(s) to use underlying assets in the contract. A lessee’s right to use an underlying asset is highly dependent on or highly interrelated with another right to use an underlying asset if each right of use significantly affects the other.

The separate lease components should be determined by considering the nature and interdependency of the individual assets covered by the arrangement. The legal form of the arrangement is generally not relevant to this analysis; a master lease for multiple assets is no more likely to be a single lease component than one with multiple leases. If the assets are functionally independent of one another, the arrangement includes multiple units of account; each should be evaluated individually to determine whether it is a lease. Conversely, if the assets covered by an arrangement are designed to function together, those assets represent a single component. For example, if a customer leases computers and monitors from a technology supplier and the monitors are not tailored to the computer (each can operate without the other by connecting to a competitor supplier’s products) the arrangement should be accounted for as two lease components. While a computer and a monitor do not function without each other, they do not need to function with one specific counterpart; any readily available competitor product can be used without impacting functionality.
Another factor to consider is how specialized the asset is. If use of the asset depends on additional assets tailored to facilitate its use, this indicates that there is a single lease component made up of multiple assets. If a technology supplier develops a monitor that can be inserted into a computer for storage, portability, and to charge the battery, the computer and monitor are likely one lease component because they are dependent on each other for full functionality.
In many real-estate leases, the lessee leases the building and the land that the building sits on. In a single tenant building, determination of the lease components may be straight forward. However, lessees in a multi-tenant, multiple-story building will also need to evaluate whether there is a land lease in the agreement. This assessment will typically depend on the significance of the tenant’s rights under the contract, as a tenant in a multi-tenant building has the right to use a non-physically distinct portion of the land on which the building is located. In this scenario, the tenant’s right to use a non-physically distinct portion of the land would only be considered an identified asset (as discussed in LG if the tenant had the rights to substantially all of the capacity of the land. For example, if the tenant was leasing nine floors of a ten-story building, it would be reasonable to conclude that the right to use the land in the arrangement is an identified asset. The arrangement would then contain a land lease component provided the other criteria for a lease were met.
In arrangements that contain a land lease component, both the lessor and the lessee should consider whether the land should be viewed as a separate lease component from the building. In general, lessors and lessees should view the lease of land as a separate lease component unless the accounting effect of doing so would be insignificant. For example, if separating the land component would have no impact on lease classification of any lease component or the amount recognized for the land lease component would be insignificant, the land component would not need to be separated from the building component.
Example LG 2-17 illustrates how to evaluate components within an arrangement and whether those components are lease or nonlease components.
Lease of a fully furnished office building
Customer Corp rents an office building from Landlord Corp for a term of 15 years. The rental contract stipulates that the office is fully furnished and has a newly installed and tailored HVAC system. It also requires Landlord Corp to perform all property maintenance during the term of the arrangement. Customer Corp makes one monthly rental payment and does not pay for the maintenance separately.
The office building has a useful life of 40 years and the HVAC system and office furniture each has a life of 15 years.
What are the units of account in the lease?
There are at least three components in the arrangement – the building assets (office and HVAC), the office furniture, and the maintenance agreement.
The office and HVAC system are one lease component because they cannot function independently of each other. The HVAC system was designed and tailored specifically to be integrated into the office building and cannot be removed and used in another building without incurring substantial costs. These building assets are a lease component because they are identified assets for which Customer Corp directs the use.
The office furniture functions independently and can be used on its own. It is also a lease component because it is a group of distinct assets for which Customer Corp directs the use.
The maintenance agreement is a nonlease component because it is a contract for service and not for the use of a specified asset.
Customer Corp will also need to consider whether separating the land would have been significant. This could be the case when, if evaluated separately, the building would be classified as a finance lease while the land would be classified as an operating lease. See LG 3 for additional information on lease classification.  
To properly account for the lease components, Customer Corp will need to determine the standalone selling price (i.e., market rents) of the use of the building assets, the use of the office furniture, and the maintenance services. If the sum of the standalone selling prices exceeds the monthly payment, the implicit discount provided for bundling the three components should be allocated between the service and each of the lease elements based on their relative standalone selling prices.

Question LG 2-4 discusses whether a lease contains more than one lease component.
Question LG 2-4
Should a reporting entity account for each floor or suite of a building subject to a single lease agreement as a separate lease component?
PwC response
It depends. A reporting entity should apply the guidance in ASC 842-10-15-28. In many cases, individual floors or suites in an office building could be used by unrelated tenants with no or little modification to the building layout, and use of a floor or suite by one tenant may not affect the use of an adjacent floor or suite by a different tenant. Generally, such a lease would meet the criteria to be separated into discrete lease components for each individual floor or suite, effectively similar to a master lease of separate assets.
Assuming the leases commence at the same date, and are co-terminus, accounting for each floor or suite as a separate lease at lease commencement may have no accounting consequence. However, if the agreement is subsequently modified such that the leases of the individual spaces are no longer co-terminus, it may become necessary for the reporting entity to identify the lease payments that would have been allocated to the respective spaces at the original commencement date of the lease (or as of the last remeasurement event, if later). See LG 5.7 for additional guidance on accounting for modifications that partially terminate a lease.

2.5.1 Portfolio exception

A reporting entity may elect to utilize a portfolio approach, under which it does not have to consider the lease components to apply lease accounting. Lessees and lessors may use the portfolio approach for leases provided its application does not create a material difference when compared to accounting for leases at the individual asset level. In addition to the materiality considerations, we would expect that a reporting entity that applies the exception would be able to demonstrate that the leases being grouped have similar characteristics. The leases should have comparable conditions regarding such clauses as default, extensions, purchase options, and lease term. Common examples of leases that may meet this criteria are office equipment (copiers, computers, phone systems with multiple handsets, etc.) or vehicle fleets that have single start and end dates.

2.5.2 Reallocation of consideration

Under specific circumstances a lessee should reallocate the consideration paid between components as discussed in ASC 842-10-15-36.

ASC 842-10-15-36

A lessee shall remeasure and reallocate the consideration in the contract upon either of the following:

  1. A remeasurement of the lease liability (for example, a remeasurement resulting from a change in the lease term or a change in the assessment of whether a lessee is or is not reasonably certain to exercise an option to purchase the underlying asset) (see paragraph 842-20-35-4)
  2. The effective date of a contract modification that is not accounted for as a separate contract (see paragraph 842-10-25-8).

See LG 5 for information on lease modifications and remeasurement. A lessee should not reallocate consideration simply as a result of changes in prices used to determine the proportionate allocations, unless there is an indication that the initial allocation was inaccurate based on information that was available at the time.

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