The number of contracts with embedded leases will likely rise as companies increasingly rely on outsourcing through supply and service contracts, many of which may now qualify as leases.
Because the guidance related to embedded leases has changed and operating leases must now be reported on the balance sheet, CPAs must understand the new lease definition and related guidance in ASC Topic 842, how to apply it to their contracts and how to identify leases embedded in their contracts.
Two criteria must be met for a contract to contain an embedded lease; cooperation between preparers and the purchasing/supply chain function will often be required to effectively and efficiently identify such contracts.