Identifying embedded leases: What you need to know

Finding embedded leases in your contracts is important to avoid misstating the balance sheet, and a lot of judgment is involved. Here to answer common questions, host Heather Horn is joined by Chad Soares and Marc Jerusalem to walk through the steps to identify embedded leases. Topics include:0:47 - Guidance reminder. Before we get into how to identify embedded leases, Marc gives a refresher on the accounting and why this topic is top of mind for companies.4:17 - Identifying embedded leases. As a general rule, an embedded lease exists if there is an explicit or implicit identified asset in the contract and the customer controls use of the asset. Chad and Marc walk through assessing if an arrangement contains an embedded lease, and covers related topics such as:7:09 - Substitution rights12:54 - Customer control over the use of the asset22:08 - You have an embedded lease. Now what? Once you identify an embedded lease, the contract needs to be separated into its lease and nonlease components. Chad walks through the steps and key considerations.28:25 - Final reminders. There are a lot of contracts that aren’t called a “lease,” but that still fall within this guidance. Marc and Chad close with some reminders and some other key takeaways.Chad Soares is a partner in PwC's National Office focused on leasing and financing arrangements. He was a primary author of PwC’s lease accounting guide and contributes to a variety of thought leadership related to leasing and financial instruments. Marc Jerusalem is a director in PwC’s National Office specializing in leasing. As a leasing specialist, Marc consults with clients on complex lease accounting issues and is a contributor to many related PwC National office publications. Heather Horn is PwC’s National Office thought leader, responsible for developing our communications strategy and conveying firm positions on accounting and financial reporting matters. She is the engaging host of PwC’s accounting and reporting weekly podcast and quarterly webcast series, as well as periodic webcasts for the power and utilities industry. With nearly 30 years of experience, Heather’s accounting and auditing expertise includes financial instruments and rate-regulated accounting.Transcripts available upon request for individuals who may need a disability-related accommodation. Please send requests to [email protected] you enjoy this episode? Text us your thoughts and be sure to include the episode name.