Lease identification

Lease identification asks whether a contract gives a customer control of identified property, plant, or equipment for a period of time in exchange for consideration. The test can apply to only part of a contract. The contract's title does not decide the answer. A logistics, hosting, warehousing, or equipment-service agreement can contain a lease.

Apply the three-part test

Identify the asset and test whether the supplier has a substantive substitution right. Then identify who obtains substantially all economic benefits from using the asset. Last, identify who makes the decisions that most affect economic use. Protective rights, such as safety limits or maintenance access, do not by themselves give the supplier direction of use.

For example, a customer selects the products, production runs, and operating speed of a specified packaging line for five years. The supplier can replace the line only after a failure. Those replacement rights protect the equipment; they do not show a practical and economically beneficial right to substitute throughout the period.

The conclusion applies to the component tested. It does not classify the lease, set the lease term, or measure a liability. Read the scope and lease-definition requirements in ASC 842-10-15-1 through 15-3 and the control test in ASC 842-10-15-4.