For convenience, most lease contracts entered into by CPS Corporation, a lessee, specify that the lessor is to pay hazard insurance premiums, but that these additional costs are embedded in the periodic payments made by CPS. CPS Corporation’s policy is to treat these costs as separate components of the lease contract (to be expensed by CPS) rather than as amounts to be capitalized as part of the right-of-use asset. Which of the following is an accurate statement regarding the company’s policy?

This approach is inappropriate because payments for maintenance and property taxes are specifically identified in the lease accounting guidance as part of the lease payments rather than nonlease components.

The policy is appropriate because as a practical expedient, the lessee is given the option to elect to include nonlease components (like maintenance).

The policy is inappropriate because those payments do not transfer to the lessee a separate good or service.

The policy is appropriate because the charge represents a transfer of a good or service to the lessee and thus qualifies as a “nonlease component” of the payment and is separated from the lease payments.