This article explains how to separate lease and service elements in a lease contract of an asset for accurate financial reporting. It also discusses the principle of not capitalizing service contracts on the statement of financial position.

Accounting for Service Costs in Lease Contracts

The answer explains that service costs included in a lease contract should be accounted for separately from the lease component. The customer does not obtain control of a resource in a service component, but rather commits to purchasing future services. The supplier retains control of the items needed to deliver the service. Service contracts are not capitalized on the balance sheet, and the lessee should separate the amounts for the lease and service components. The allocation of amounts should be based on relative stand-alone prices.

Learn the best practices for accurately incorporating service costs into your asset lease contracts to ensure transparent and fair accounting.

How to Account for Costs of Service in a Lease Contract of an Asset

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