As from 1 January 2019, the lessee is required to recognise almost all lease contracts on the balance sheet. The distinction between operating lease and finance lease has almost been vanished. The only optional exemptions are for certain short-term leases and leases of low-value assets. Quiz -Does a contract include a lease?
IFRS 16 defines a lease as a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration. Quiz -Does a contract include a lease?
This walk through decision model may assist in determining if a contract contains a lease within the scope of IFRS 16 Leases.
|The first question that comes to mind in IFRS 16 is: Is there an identified asset?|
Consider the explanations in Identified asset, before answering the question yes or no. You will be going to the next question or come to a conclusion.
|This is part of the walk through decision model that may assist in determining if a contract contains a lease within the scope of IFRS 16 Leases.|
Even if an asset is specified, a customer does not have the right to use an identified asset if, at inception of the contract, a supplier has the substantive right to substitute the asset throughout the period of use (i.e., the total period of time that an asset is used to fulfil a contract with a customer, including the sum of any non-consecutive periods of time). When is an asset identified?
A substitution right is substantive if the supplier has the practical ability to substitute alternative assets throughout the period of use and the supplier would benefit economically from exercising its right to substitute the asset.
In many cases, it will be clear that the supplier will not benefit from the exercise of a substitution right because of the costs associated with substituting an asset. The physical location of the asset may affect the costs associated with substituting an asset. For example, if an asset is located at the customer’s premises, the cost associated with substituting it is generally higher than the cost of substituting a similar asset located at the supplier’s premises. However, simply because a supplier concludes that the cost of substitution is not significant does not automatically mean that it would economically benefit from the right of substitution.