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Embedded leases need to be reported in your financial statements. However, they are often and easily overlooked.

Operations

Coffee and Embedded Leases

  • Walker Wilkerson
  • 4/16/2021

Key insights

  • Embedded leases are found in every industry.
  • These leases need to be reported in your financial statements.
  • You can make embedded leases easier to identify with a few modifications to your current business practices.

Leases are easy to identify because they have the word lease in the title of the contract — right? Not so fast. Many service contracts rely on the use of underlying assets. Those assets are called embedded leases and need to be reported in your financial statements.

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For example, does your organization have a coffee service contract? If so, you have an embedded lease! The coffee machine is the underlying asset that your organization controls.

Embedded leases are found in every industry and are often and easily overlooked. You can make embedded leases easier to identify with a few tweaks to your current business practices:

  • Understand your industry and where embedded leases commonly occur. This will help narrow the population.
  • Develop controls to identify and gather your service contracts as well as standard lease agreements. Require all new contracts and agreements to be evaluated before executing.
  • Look at your expenses for recurring monthly or quarterly charges and determine if an in-depth review is necessary.

Most organizations haven’t considered these types of leases in the past. The initial identification process is often extensive and can take longer than you think. Consider your available capacity to tackle the new standard.

Lease implementation can take longer than you think. Do you need assistance? Do you have questions?

How CLA can help

CLA can help you take steps to stay ahead of new lease accounting standards. We can help assess organizational impacts beyond general accounting and financial reporting, and then walk through readiness assessment, software selection and analysis, and implementation.

Our turnkey lease accounting assistance includes:

  • Assistance to identify and analyze leases that are subject to the standard
  • Delivery of leased asset schedules, journal entries, and comprehensive footnote disclosures
  • Updated and revised information at future interim or annual periods based on your needs

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