What is the Difference Between a Lease and a Service Contract?

What is a Lease

A lease provides an organization with the explicit right to use and control a specific asset for a defined period in exchange for payments. Leases involve the rights and responsibilities related to asset usage and may require recognition of assets and liabilities on the balance sheet under accounting standards such as GASB 87 and ASC 842.

Key characteristics of leases:

• Grants control of a specific asset.
• Recognizes assets and liabilities on balance sheets.
• Includes clear terms related to asset usage and duration.

What is a Service Contract?

A service contract primarily involves an agreement for performing specific tasks or services rather than granting asset usage rights. These contracts typically do not result in the recognition of an asset or liability on financial statements.

Key characteristics of a service contract:

• Focuses on tasks or services performed.
• Does not transfer control or usage rights of a specific asset.
• Payments recorded as operational expenses.

Why the Distinction is Important

Correctly distinguishing between leases and service contracts ensures compliance with accounting standards, accurate financial reporting, and informed budgeting and financial management decisions.

What’s important here?

A lease grants control and usage rights over a specific asset, while a service contract is focused on providing tasks or services without transferring asset control. Proper classification is critical for regulatory compliance and accurate financial statements in public finance sectors.