Key points
Lease accounting covers how lessees and lessors recognize, measure and disclose contracts that convey the right to control an identified asset for a period.
US companies follow ASC 842, IFRS reporters follow IFRS 16, and US state and local governments follow GASB 87.
Lessees put almost every lease longer than 12 months on the balance sheet as a right-of-use asset and a lease liability.
For AI and infrastructure-heavy startups, the hardest part is spotting embedded leases inside compute, colocation and hardware contracts.
Under US GAAP, operating and finance classification changes where expense lands, which can move gross margin and EBITDA.
Definition
Lease accounting is the set of rules for recording contracts that give one party the right to control an identified asset owned by another, for a period of time, in exchange for payment. The lessee records the right to use the asset and the obligation to pay. The lessor records either a receivable or keeps the asset on its books, depending on the lease type. The detailed US mechanics are covered on our ASC 842 page; this page focuses on spotting leases and understanding their effect.
Which standard applies
ASC 842 (US GAAP) | IFRS 16 | GASB 87 | |
|---|---|---|---|
Who uses it | US public and private companies, nonprofits | Entities reporting under IFRS | US state and local governments |
Lessee models | Two: operating and finance | One: all leases treated like finance leases | One single model |
Lessee expense pattern | Operating: straight-line single cost. Finance: amortization plus interest | Depreciation plus interest | Amortization plus interest |
Short-term exemption | 12 months or less, elected by asset class | 12 months or less | 12 months or less |
Low-value asset exemption | No explicit exemption | Yes | No |
Is it a lease? A decision table for startup contracts
A contract contains a lease when there is an identified asset and the customer has the right to obtain substantially all of its economic benefits and to direct how it is used. Supplier substitution rights that are practical and beneficial to the supplier usually mean there is no identified asset.
Contract | Identified asset? | You direct use? | Usual answer |
|---|---|---|---|
Office lease for a named floor | Yes | Yes | Lease |
Coworking membership, any open desk | No, provider can move you | No | Service, not a lease |
On-demand cloud compute or committed spend | No, provider chooses hardware | No | Service, not a lease |
Dedicated GPU servers specified by serial number, no substitution | Yes | Often yes | Likely an embedded lease |
Private colocation cage with your racks | Often yes | Often yes | Likely a lease of the space |
SaaS subscription | No | No | Service; implementation costs may follow ASC 350-40 |
Worked example: a dedicated GPU cluster
Fieldnote AI, a fictional Series B company with usage-based pricing, signs a 24-month contract for eight GPU servers identified by serial number. The provider cannot swap them, and Fieldnote decides what workloads run. Payments are $50,000 a month in arrears. The incremental borrowing rate is 7%. The servers have a useful life well beyond 24 months and payments are well below their fair value, so the lease is classified as operating. All figures are illustrative.
Present value of 24 payments of $50,000 at 7% a year, monthly: $1,116,755.
Account | Debit | Credit |
|---|---|---|
Commencement: Right-of-use asset, GPU servers | 1,116,755 | |
Commencement: Operating lease liability | 1,116,755 | |
Month 1: Lease cost, COGS | 50,000 | |
Month 1: Operating lease liability (50,000 less 6,514 interest) | 43,486 | |
Month 1: Cash | 50,000 | |
Month 1: Right-of-use asset | 43,486 | |
Total | 1,210,241 | 1,210,241 |
Why classification moves gross margin
If the same contract were a finance lease, month 1 would show amortization of $46,531 ($1,116,755 over 24 months) in COGS and $6,514 of interest below operating income. Compare the month-one COGS:
Month 1 | Operating lease | Finance lease |
|---|---|---|
Charged to COGS | 50,000 | 46,531 |
Interest expense, below operating income | 0 | 6,514 |
Total expense | 50,000 | 53,045 |
A finance lease shows higher gross margin and EBITDA early on, but higher total expense. Make sure the board knows which one is behind the margin trend, especially if you have a mix of both.
Common mistakes
Treating every infrastructure contract as a service without reading the substitution clause.
Missing leases signed outside finance, such as warehouse space or hardware financing.
Coding lease cost for production servers to G&A instead of COGS.
Ignoring modifications such as an early expansion of the cluster, which require remeasurement.
Lease identification checklist
Collect every contract that involves space, hardware or dedicated capacity.
For each, answer three questions: identified asset, substantially all benefits, right to direct use.
Record conclusions in a lease register, including contracts judged not to be leases.
Classify each lease and pick the discount rate.
Map lease cost to the right P&L line, especially COGS for production infrastructure.
How Quanta handles it
Quanta integrates with cloud bills and spend tools such as Ramp, and tags COGS lines so infrastructure cost stays in cost of revenue. Its in-house accounting team keeps the ledger, and every number traces back to journal entries.
Quanta perspective
In AI businesses the most material lease is often not the office. It is dedicated compute buried in a capacity contract, and whether it is a lease, and which kind, changes both the balance sheet and the gross margin you price against.
Frequently asked questions
What is the difference between an operating lease and a finance lease?
Under ASC 842 both go on the balance sheet. An operating lease produces a single straight-line lease cost, while a finance lease produces separate amortization and interest expense, with more expense early in the term.
Is cloud computing a lease?
Usually not. Standard cloud services do not give you control of identified hardware. Dedicated servers that the provider cannot substitute can contain a lease.
Do short-term leases go on the balance sheet?
Lessees can elect, by asset class, to keep leases of 12 months or less with no purchase option they are reasonably certain to exercise off the balance sheet and expense them straight-line.
What replaced ASC 840?
ASC 842 replaced ASC 840 for US GAAP. It is effective for public companies for fiscal years beginning after December 15, 2018, and for private companies for fiscal years beginning after December 15, 2021.
Does IFRS 16 have operating leases for lessees?
No. IFRS 16 uses a single lessee model, so nearly all leases are accounted for like finance leases, with depreciation and interest.