of observable information, of the lease and non-lease components, as follows:
Lease CU85,000
Maintenance CU15,000
Total CU100,000
Analysis: The stand-alone price for the lease component represents 85% of total estimated stand-alone prices.
The lessee allocates the consideration in the contract (CU90,000), as follows:
Lease CU76,500
(1)
Maintenance CU13,500
(2)
Total CU90,000
(1) 85% × CU90,000
(2) 15% × CU90,000
The following example from the IFRS 16 illustrative examples illustrates the allocation
of consideration in a contract to lease and non-lease components by a lessee. [IFRS 16.IE4].
Example 24.10: Lessee allocation of consideration to lease and non-lease
components of a contract (IFRS 16 Example 12)
Lessor leases a bulldozer, a truck and a long-reach excavator to Lessee to be used in Lessee’s mining
operations for four years. Lessor also agrees to maintain each item of equipment throughout the lease term.
The total consideration in the contract is CU600,000(a), payable in annual instalments of CU150,000, and a
variable amount that depends on the hours of work performed in maintaining the long-reach excavator. The
variable payment is capped at 2 per cent of the replacement cost of the long-reach excavator. The
consideration includes the cost of maintenance services for each item of equipment.
(a) In these Illustrative Examples, currency amounts are denominated in ‘currency units’ (CU).
Lessee accounts for the non-lease components (maintenance services) separately from each lease of
equipment applying paragraph 12 of IFRS 16. Lessee does not elect the practical expedient in paragraph 15
of IFRS 16. Lessee considers the requirements in paragraph B32 of IFRS 16 and concludes that the lease of
the bulldozer, the lease of the truck and the lease of the long-reach excavator are each separate lease
components. This is because:
(a) Lessee can benefit from use of each of the three items of equipment on its own or together with other
readily available resources (for example, Lessee could readily lease or purchase an alternative truck or
excavator to use in its operations); and
(b) Although Lessee is leasing all three items of equipment for one purpose (i.e. to engage in mining
operations), the machines are neither highly dependent on, nor highly interrelated with, each other.
Lessee’s ability to derive benefit from the lease of each item of equipment is not significantly affected
by its decision to lease, or not lease, the other equipment from Lessor.
1712 Chapter 24
Consequently, Lessee concludes that there are three lease components and three non-lease components
(maintenance services) in the contract. Lessee applies the guidance in paragraphs 13–14 of IFRS 16 to
allocate the consideration in the contract to the three lease components and the non-lease components.
Several suppliers provide maintenance services for a similar bulldozer and a similar truck. Accordingly,
there are observable standalone prices for the maintenance services for those two items of leased
equipment. Lessee is able to establish observable stand-alone prices for the maintenance of the bulldozer
and the truck of CU32,000 and CU16,000, respectively, assuming similar payment terms to those in the
contract with Lessor. The long-reach excavator is highly specialised and, accordingly, other suppliers do
not lease or provide maintenance services for similar excavators. Nonetheless, Lessor provides four-year
maintenance service contracts to customers that purchase similar long-reach excavators from Lessor. The
observable consideration for those four-year maintenance service contracts is a fixed amount of CU56,000,
payable over four years, and a variable amount that depends on the hours of work performed in maintaining
the long-reach excavator.
That variable payment is capped at 2 per cent of the replacement cost of the long-reach excavator.
Consequently, Lessee estimates the stand-alone price of the maintenance services for the long-reach
excavator to be CU56,000 plus any variable amounts. Lessee is able to establish observable stand-alone
prices for the leases of the bulldozer, the truck and the long-reach excavator of CU170,000, CU102,000
and CU224,000, respectively.
Lessee allocates the fixed consideration in the contract (CU600,000) to the lease and non-lease components
as follows:
CU Bulldozer
Truck
Long-reach
excavator
Total
Lease 170,000
102,000
224,000
496,000
Non-lease
104,000
Total fixed consideration
600,000
Lessee allocates all of the variable consideration to the maintenance of the long-reach excavator, and,
thus, to the non-lease components of the contract. Lessee then accounts for each lease component
applying the guidance in IFRS 16, treating the allocated consideration as the lease payments for each
lease component.
3.2.4
Determining and allocating the consideration in the contract – lessors
3.2.4.A
Determining the consideration in the contract
As discussed at 3.2.3.A above, IFRS 16 does not define ‘consideration’ in a lease contract,
nor is ‘consideration’ defined in the IFRS Glossary. However, we believe that the
consideration in a lease contract for a lessor would include the following:
(a) lease payments as described at 4.5 below;
(b) the following other payments not labelled in the contract as lease payments:
(i)
any other fixed payments (e.g. monthly service charges, non-lease components
such as maintenance) or in-substance fixed payments made during the lease
term, less any incentives paid or payable to the lessee;
(ii) any other variable payments that depend on an index or a rate made during the
lease term and initially measured using the index or rate at the commencement
date; and
(iii) any other variable payment amounts that would be included in the transaction
price in accordance with the requirements on variable consideration in
IFRS 15 that specifically relate to either of the following:
Leases (IFRS 16) 1713
(A) the lessor’s efforts to transfer one or more goods or services that are not
leases; or
(B) an outcome from transferring one or more goods or services that are
not leases.
Variable consideration is defined broadly in IFRS 15 and can take many forms.
Consideration can vary because of discounts, rebates, refunds, credits, price concessions,
incentives, performance bonuses, penalties or other similar items. It is important for
lessors to appropriately identify the different types of variable consideration included in
the contract because estimating variable consideration requires lessors to apply a
constraint to each type of variable consideration. See Chapter 28 at 6.2.3 for further
discussion on variable consideration under IFRS 15.
3.2.4.B
Allocating the consideration in the contract – lessors
For a contract that contains a lease component and one or more additional lease or non-
lease components, a lessor allocates the consideration in the contract applying
&
nbsp; paragraphs 73 to 90 of IFRS 15. [IFRS 16.17].
Paragraphs 73 to 86 of IFRS 15 require the lessor to allocate the consideration in the
contract between the lease and non-lease components on a relative stand-alone selling
price basis. In addition, lessors are required to apply paragraphs 87-90 of IFRS 15 to
allocate any subsequent changes in the consideration of the contract between the lease
and non-lease components. The stand-alone selling price is the price at which an entity
would sell a promised good or service separately to a customer. When stand-alone
selling prices are not directly observable, the lessor must estimate the stand-alone
selling price. Paragraph 79 of IFRS 15 provides suitable methods for estimating the
stand-alone selling price. See Chapter 28 at 7.1 for further discussion on estimating
stand-alone selling prices under IFRS 15.
3.3 Contract
combinations
An entity combines two or more contracts entered into at or near the same time with
the same counterparty (or related parties of the counterparty), and accounts for the
contracts as a single contract if one or more of the following criteria are met:
(a) the contracts are negotiated as a package with an overall commercial objective that
cannot be understood without considering the contracts together;
(b) the amount of consideration to be paid in one contract depends on the price or
performance of the other contract; or
(c) the rights to use underlying assets conveyed in the contracts (or some rights to use
underlying assets conveyed in each of the contracts) form a single lease
component. [IFRS 16.B2].
The IASB developed these criteria to address concerns that separately accounting for
multiple contracts may not result in a faithful representation of the combined
transaction. [IFRS 16.BC130-132].
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4 KEY
CONCEPTS
4.1
Inception date of the lease (inception date)
IFRS 16 requires customers and suppliers to determine whether a contract is a lease at
inception of the lease. The inception date is the earlier of the date of a lease agreement
and the date of commitment by the parties to the principal terms and conditions of the
lease. [IFRS 16 Appendix A].
The underlying asset is the asset that is subject to a lease, for which the right to use that
asset has been provided by a lessor to a lessee. [IFRS 16 Appendix A].
4.2
Commencement date of the lease
The commencement date of the lease is the date on which the lessor makes an
underlying asset available for use by a lessee. [IFRS 16 Appendix A]. In some cases, the
commencement date of the lease may be before the date stipulated in the lease
agreement (e.g. the date on which rents become due and payable). This often occurs
when the leased space is modified by the lessee prior to commencing operations in the
leased space (e.g. during the period a lessee uses the leased space to construct its own
leasehold improvements). If a lessee takes possession of, or is given control over, the
use of the underlying asset before it begins operations or making lease payments under
the terms of the lease, the lease term has commenced even if the lessee is not required
to pay rent or the lease arrangement states the lease commencement date is a later date.
The timing of when lease payments begin under the contract does not affect the
commencement date of the lease. For example, a lessee (except for a lessee applying
the short-term lease or lease of low-value asset exemption discussed at 5.1.1 and 5.1.2
below) initially recognises a lease liability and related right-of-use asset on the
commencement date and a lessor (for finance leases) initially recognises its net
investment in the lease on the commencement date.
4.3
Lessee involvement with the underlying asset before the
commencement date
An entity may negotiate a lease before the underlying asset is available for use by the
lessee. For some leases, the underlying asset may need to be constructed or redesigned
for use by the lessee. Depending on the terms and conditions of the contract, a lessee
may be required to make payments relating to the construction or design of the asset.
[IFRS 16.B43].
If a lessee incurs costs relating to the construction or design of an underlying asset, the
lessee accounts for those costs applying other IFRS, such as IAS 16 – Property, Plant
and Equipment. Costs relating to the construction or design of an underlying asset do
not include payments made by the lessee for the right to use the underlying asset.
Payments for the right to use an underlying asset are payments for a lease, regardless of
the timing of those payments. [IFRS 16.B44].
A lessee may obtain legal title to an underlying asset before that legal title is transferred
to the lessor and the asset is leased to the lessee. Obtaining legal title does not in itself
determine how to account for the transaction. [IFRS 16.B45].
Leases (IFRS 16) 1715
If the lessee controls (or obtains control of) the underlying asset before that asset is
transferred to the lessor, the transaction is a sale and leaseback transaction that is
accounted for as described at 8 below. [IFRS 16.B46].
However, if the lessee does not obtain control of the underlying asset before the asset is
transferred to the lessor, the transaction is not a sale and leaseback transaction. For
example, this may be the case if a manufacturer, a lessor and a lessee negotiate a transaction
for the purchase of an asset from the manufacturer by the lessor, which is in turn leased to
the lessee. The lessee may obtain legal title to the underlying asset before legal title
transfers to the lessor. In this case, if the lessee obtains legal title to the underlying asset but
does not obtain control of the asset before it is transferred to the lessor, the transaction is
not accounted for as a sale and leaseback transaction, but as a lease. [IFRS 16.B47].
4.4
Lease term and purchase options
An entity determines the lease term as the non-cancellable period of the lease, together
with both:
• periods covered by an option to extend the lease if the lessee is reasonably certain
to exercise that option; and
• periods covered by an option to terminate the lease if the lessee is reasonably
certain not to exercise that option. [IFRS 16.18].
The phrase ‘reasonably certain’ was also used in IAS 17 and is generally interpreted as a
high threshold. Therefore, the IASB does not anticipate a change in practice.
Purchase options are assessed in the same way as options to extend or terminate the
lease. The IASB indicated that an option to purchase an underlying asset is economically
similar to an option to extend the lease term for the remaining economic life of the
underlying asset. [IFRS 16.BC173].
The lease term begins at the commencement date and includes any rent-free periods
provided to the lessee by the lessor. [IFRS 16.B36].
At the commencement date, an entity assesses whether the lessee is reasonably certain
to exercise an option to extend the lease or to purchase the underlying asset, or not to
exercise an option to terminate the leas
e. [IFRS 16.19, IFRS 16.B37].The entity considers all
relevant facts and circumstances that create an economic incentive for the lessee to
exercise, or not to exercise, the option, including any expected changes in facts and
circumstances from the commencement date until the exercise date of the option.
Examples of factors to consider include, but are not limited to:
(a) contractual terms and conditions for the optional periods compared with market
rates, such as:
(i) the amount of payments for the lease in any optional period;
(ii) the amount of any variable payments for the lease or other contingent
payments, such as payments resulting from termination penalties and residual
value guarantees; and
(iii) the terms and conditions of any options that are exercisable after initial
optional periods (for example, a purchase option that is exercisable at the end
of an extension period at a rate that is currently below market rates).
1716 Chapter 24
(b) significant leasehold improvements undertaken (or expected to be undertaken)
over the term of the contract that are expected to have significant economic
benefit for the lessee when the option to extend or terminate the lease, or to
purchase the underlying asset, becomes exercisable;
(c) costs relating to the termination of the lease, such as negotiation costs, relocation
costs, costs of identifying another underlying asset suitable for the lessee’s needs,
costs of integrating a new asset into the lessee’s operations, or termination
penalties and similar costs, including costs associated with returning the underlying
asset in a contractually specified condition or to a contractually specified location;
(d) the importance of that underlying asset to the lessee’s operations, considering, for
example, whether the underlying asset is a specialised asset, the location of the
underlying asset and the availability of suitable alternatives; and
(e) conditionality associated with exercising the option (i.e. when the option can be
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 338
