Analysis: Customer X has the right to direct the use of the identified vehicle throughout the period of use.
Customer X has the right to direct the use of the vehicle because it has the right to change how the vehicle is
used, when or whether the vehicle is used, where the vehicle goes and what the vehicle is used for.
Supplier Y’s limits on certain uses for the vehicle and modifications to it are considered protective rights that
define the scope of Customer X’s use of the asset but do not affect the assessment of whether Customer X
directs the use of the asset.
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3.1.6
Flowchart of the decision making process
IFRS 16 contains a flowchart that depicts the decision making process for determining
whether an arrangement contains a lease [IFRS 16.B31] and provides a summary of the
discussion in 3.1.2 through 3.1.5.D above. This has been reproduced below.
Is there an identified asset?
No
Consider paragraphs B13-20.
Yes
Does the customer have the right to
obtain substantially all of the
No
economic benefits from use of the
asset throughout the period of use?
Consider paragraphs B21-B23.
Yes
Does the customer, the supplier or
Customer
neither party have the right to direct
Supplier
how and for what purpose the asset
is used throughout the period of use?
Consider paragraphs B25-B30.
Neither;
how and for what purpose the asset
will be used is predetermined
Does the customer have the right to
operate the asset throughout the
Yes
period of use, without the supplier
having the right to change those
operating instructions?
Consider paragraph B24(b)(i).
No
Did the customer design the asset in
a way that predetermines how and
for what purpose the asset will be
No
used throughout the period of use?
Consider paragraph B24(b)(ii).
Yes
The
The
contract
contract
does not
contains a
contain a
lease
lease
We believe that the assessment of whether a contract is or contains a lease will be
straightforward in most arrangements. However, judgement may be required in
applying the definition of a lease to certain arrangements.
Leases (IFRS 16) 1707
3.1.7
Reassessment of the contract
An entity reassesses whether a contract is, or contains, a lease only if the terms and
conditions of the contract are changed. [IFRS 16.11]. A change in the terms and conditions
of a contract does not include the exercise of an option (e.g. a renewal option) or failure
to exercise an option that is included in the contract.
3.2
Identifying and separating lease and non-lease components of a
contract
3.2.1
Identifying and separating lease components of a contract
An entity accounts for each lease component within a contract as a lease separately
from non-lease components of the contract, unless the entity (lessees only) applies the
practical expedient in paragraph 15 of IFRS 16. [IFRS 16.12]. See 3.2.2.B below.
The right to use an underlying asset is a separate lease component if both:
(a) the lessee can benefit from use of the underlying asset either on its own or together
with other resources that are readily available to the lessee. Readily available
resources are goods or services that are sold or leased separately (by the lessor or
other suppliers) or resources that the lessee has already obtained (from the lessor
or from other transactions or events); and
(b) the underlying asset is neither highly dependent on, nor highly interrelated with,
the other underlying assets in the contract. For example, the fact that a lessee could
decide not to lease the underlying asset without significantly affecting its rights to
use other underlying assets in the contract might indicate that the underlying asset
is not highly dependent on, or highly interrelated with, those other underlying
assets. [IFRS 16.B32].
If one or both of these criteria are not met, the right to use multiple assets is considered
a single lease component.
A contract may include an amount payable by the lessee for activities and costs that do
not transfer a good or service to the lessee. For example, a lessor may include in the
total amount payable a charge for administrative tasks, or other costs it incurs associated
with the lease, that do not transfer a good or service to the lessee. Such amounts payable
do not give rise to a separate component of the contract, but are considered to be part
of the total consideration that is allocated to the separately identified components of
the contract. [IFRS 16.B33].
Example 24.7: Identifying and separating lease components
Scenario A
Assume that a lessee enters into a lease of an excavator and the related accessories (e.g. excavator
attachments) that are used for mining purposes. The lessee is a local mining company that intends to use the
excavator at a copper mine.
Analysis: From the perspective of the lessee, the contract contains one lease component. The lessee would be
unable to benefit from the use of the excavator without also using the accessories. Therefore, the excavator
is dependent upon the accessories.
1708 Chapter 24
Scenario B
Assume the same facts as in Scenario A, except that the contract also conveys the right to use an additional
loading truck. This loading truck could be deployed by the lessee for other uses (e.g. to transport iron ores at
another mine).
Analysis: From the perspective of the lessee, the contract contains two lease components: a lease of the
excavator (together with the accessories) and a lease of the loading truck. Because the loading truck could be
deployed for other uses independent of the excavator, the lessee can benefit from the loading truck on its own
or together with other readily available resources. The lessee can also benefit from the use of the excavator
on its own or together with other readily available resources.
For contracts that involve the right to use land and land improvements (e.g. buildings),
IFRS 16 requires a lessor to classify (see 6.1 below) and account for the right to use land
as a separate lease component, unless the accounting effect of doing so is immaterial to
the lease. [IFRS 16.B57]. For example, separation of the land may not be necessary when
the amount that would be recognised for the land lease component is immaterial to the
lease. If the lease payments cannot be allocated reliably between the land and the
buildings, the entire lease is classified as a finance lease, unless it is clear that both
elements are operating leases (i.e. the entire lease is classified as an operating lease).
[IFRS 16.B56]. An entity that leases an entire building (i.e. 100% of the building) is inherently
leasing the land underneath the building and would potentially account for the land and
>
building as separate lease components. However, this would not necessarily be the case
when an entity only leases part of the building.
3.2.2
Identifying and separating lease from non-lease components of a
contract
Many contracts contain a lease coupled with an agreement to purchase or sell other goods
or services (non-lease components). The non-lease components are identified and
accounted for separately from the lease component in accordance with other standards,
unless the lessee applies the practical expedient as discussed at 3.2.2.B below. [IFRS 16.16].
For example, the non-lease components may be accounted for as executory arrangements
by lessees (customers) or as contracts subject to IFRS 15 by lessors (suppliers).
Some contracts contain items that do not relate to the transfer of goods or services by
the lessor to the lessee (e.g. fees or other administrative costs a lessor charges a lessee).
These items are not considered separate lease or non-lease components, and lessees
and lessors do not allocate consideration in the contract to these items. [IFRS 16.B33]. See
3.2.3.B below. However, if the lessor provides goods or services, such as maintenance,
supply of utilities, including operating the underlying asset for the customer (e.g. vessel
charter, aircraft wet lease), the contract would generally contain non-lease components.
Identifying non-lease components of contracts may change practice for some lessees.
Under IAS 17, entities may not focus on identifying lease and non-lease components
because the accounting treatment (e.g. accounting for an operating lease and a service
contract) is often the same.
3.2.2.A Lessee
reimbursements
Under IFRS 16, payments for maintenance activities, including common area
maintenance (e.g. cleaning the common areas of a building, removing snow from a car
park for employees and customers) and other goods or services transferred to the
Leases (IFRS 16) 1709
tenant
(e.g. providing utilities or rubbish removal) are considered non-lease
components because they provide the lessee with a service.
In some leases, a lessee may also reimburse (or make certain payments on behalf of) the
lessor that relate to the leased asset for activities and costs that do not transfer a good
or service to the lessee (e.g. payments made for real estate taxes that would be owed by
the lessor regardless of whether it leased the building and regardless of who the lessee
is, payments made for insurance that protects the lessor’s investment in the asset and
the landlord will receive the proceeds from any claim). Under IFRS 16, such costs are
not separate components of the contract because they do not represent payments for
goods or services and are considered to be part of the total consideration that is
allocated to the separately identified components of the contract (i.e. the lease and non-
lease components). Entities also need to evaluate whether such payments are fixed (or
in-substance fixed) lease payments or variable lease payments. See 4.5 below.
Example 24.8: Activities that are not components of a lease contract
Scenario A
A lessee enters into a three-year lease of equipment, with fixed annual payments of CU12,000. The contract
itemises the fixed annual payments as follows: CU9,000 for rent, CU2,500 for maintenance and CU500 of
administrative tasks.
Analysis: The contract contains two components – one lease component (lease of equipment) and a non-lease
component (maintenance). The amount paid for administrative tasks does not transfer a good or service to the
lessee. Therefore, the total consideration in the contract of CU36,000 will be allocated to the lease component
(equipment) and the non-lease component (maintenance).
Scenario B
Assume the fact pattern as in scenario A except that, in addition, the contract requires the lessee to pay for
the restoration of the equipment to its original condition.
Analysis: The contract still contains two components – one lease component (lease of equipment) and a non-
lease component (maintenance). Similar to the amount paid for administrative tasks, the restoration does not
transfer a good or service to the lessee as it is only performed at the end of the lease term. Therefore, the total
consideration in the contract will be allocated to the lease component (equipment) and the non-lease
component (maintenance). See 5.2.1 below for further discussion on the inclusion of restoration costs to the
initial measurement of the right-of-use asset.
3.2.2.B
Practical expedient – lessees
As a practical expedient, a lessee may elect, by class of underlying asset, not to
separate non-lease components from lease components, and instead account for each
lease component and any associated non-lease components as a single lease
component. A lessee cannot apply this practical expedient to embedded derivatives
that meet the criteria in paragraph 4.3.3 of IFRS 9 – Financial Instruments. [IFRS 16.15].
See Chapter 42 at 4.
IFRS 16 provides this expedient to alleviate concerns that the costs and administrative
burden of allocating consideration to separate lease and non-lease components may not
be justified by the benefit of more precisely reflecting the right-of-use asset and the lease
liability. Furthermore, the IASB expects the practical expedient to most often be used
when the non-lease components of a contract are not significant when compared with the
lease components of a contract. [IFRS 16.BC135 (b)]. The practical expedient does not allow
lessees to account for multiple lease components of a contract as a single lease component.
1710 Chapter 24
Although it is not explicitly stated, we believe that non-lease components relate to
services contained within the lease contract. Paragraphs BC133 and BC135 of the Basis
for Conclusions to IFRS 16 refer to non-lease components being service components.
Therefore, when a lease includes a component related to the purchase of inventory or
another asset such as property, plant and equipment or an intangible asset, we believe
an entity should separate these asset components from other lease and non-lease
components, even if it has elected to apply the practical expedient to the class of
underlying asset to which the lease relates. For example, if a contract contains a lease
as well as non-lease components related to a service and the purchase of sheet metal to
be used in the construction of inventory, we believe the purchase of the sheet metal
should be accounted for as a component of inventory rather than together with the lease
component as the purchase of a physical good is not a ‘non-lease component associated
with that lease component’.
Lessees that make the policy election to account for each separate lease component of
a contract and any associated non-lease components as a single lease component
allocate all of the contract consideration to the lease component. Therefore, the initial
and subsequent measurement of the lease liability and right-of-use asset is higher than
if the policy election was not applied.
3.2.3
Determining and allocating the consideration in the contract –
lessees
3.2.3.A
<
br /> Determining the consideration in the contract
IFRS 16 does not define ‘consideration’ in a contract, nor is ‘consideration’ defined in
the IFRS Glossary. However, we believe that the consideration in a contract for a lessee
would include all the lease payments described at 4.5 below, as well as certain other
consideration in the contract regardless of whether it is labelled as lease payments or
payments for non-lease components of a contract, including other fixed payments (e.g.
monthly service charges) or in-substance fixed payments, variable payments that
depend on an index or a rate, initially measured using the index or rate at the
commencement date, less any incentives paid or payable to the lessee, other than those
included in lease payments.
3.2.3.B
Allocating the consideration in the contract – lessees
For a contract that contains a lease component and one or more additional lease or non-
lease components, a lessee allocates the consideration in the contract to each lease
component on the basis of the relative stand-alone price of the lease component and
the aggregate stand-alone price of the non-lease components. [IFRS 16.13].
The relative stand-alone price of lease and non-lease components is determined
on the basis of the price the lessor, or a similar supplier, would charge an entity for
that component, or a similar component, separately. If an observable stand-alone
price is not readily available, the lessee estimates the stand-alone price, maximising
the use of observable information. [IFRS 16.14]. A contractually stated price may be
the stand-alone price for a good or service but it is not presumed to be for
accounting purposes.
Leases (IFRS 16) 1711
Example 24.9: Allocating contract consideration to lease and non-lease
components – lessees
A lessee enters into a lease of equipment. The contract stipulates the lessor will perform maintenance of the
leased equipment and receive consideration for that maintenance service. The contract includes the following
fixed prices for the lease and non-lease components:
Lease CU80,000
Maintenance CU10,000
Total CU90,000
Assume the stand-alone prices cannot be readily observed, so the lessee makes estimates, maximising the use
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 337