Embedded lease
A lease contained within a wider service, outsourcing, or supply contract — often not labelled as a lease.
Definition
An embedded lease arises when a service or supply contract conveys the right to control the use of an identified asset for a period of time, even though the contract is not described as a lease. Common examples include dedicated warehouse space within a logistics contract, specific machinery within a manufacturing services arrangement, or exclusive use of a server within a data centre contract. IFRS 16 and amended FRS 102 require entities to assess whether contracts contain embedded leases.
Why it matters
Embedded leases are one of the most common sources of lease omissions in financial statements. A contract labelled as a "service agreement" may still contain a lease component that must be recognised on the balance sheet.
In AuditLease
Future AuditLease checklists and onboarding resources can help users identify contracts that may contain embedded leases before they are entered into the lease register.
Related terms
Put this into practice with AuditLease
AuditLease handles IFRS 16 and FRS 102 lease calculations, statutory note generation, journal entries, and audit evidence, so your team spends less time on spreadsheets and more time on judgements.
This definition is for general information only and is not accounting or legal advice. Definitions are based on IFRS 16, FRS 102, and associated guidance published by the IFRS Foundation and the Financial Reporting Council. Users should refer to the applicable accounting standards and their professional advisers for judgement-specific matters.