Lease vs. Service Contract
Related terms
Category
ASC 842
Determining whether an arrangement is a lease or a service contract is a critical classification decision under ASC 842. A contract contains a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Service contracts, by contrast, provide the output of an asset without transferring control.
Why it matters
The lease-vs-service distinction determines whether an arrangement goes on the balance sheet. A lease creates a right-of-use asset and lease liability. A service contract is expensed as incurred with no balance sheet impact. The key test is whether the customer controls the use of an identified asset. directing how and for what purpose it is used. Many arrangements (data centers, managed equipment, dedicated vehicles) require careful analysis because they contain elements of both.
How Arvexi handles this
Arvexi's AI analyzes contract language to identify whether arrangements contain lease components, service components, or both. The platform flags embedded leases in service contracts and separates lease from non-lease components based on standalone prices. ensuring proper balance sheet treatment and preventing off-balance-sheet leases.