IFRS 16 - Right To Use – FAQ | IFRS

IFRS 16 – Right to Use

Some illustrative background to ‘Right to Use’

Throughout the period of use the lessee has to meet the following two rights:

  1. the right to obtain substantially all of the economic benefits from the use of the identified asset, and
  2. the right to direct the use of the identified asset.


To start simple…..

  1. By having exclusive use of the asset over the period of the lease, by having use of its output or by sub-letting the asset, the right to obtain substantially all of the economic benefits from the use of the identified asset has been met, and
  2. By having the the client decide how an asset will be used and for what purpose, the right to direct the use of the identified asset has been met.

Example 1 – Lease (?) of a server IFRS 16 – Right to Use

A client enters into a contract with an information technology company (Supplier) for the use of an identified server for three years. Supplier delivers and installs the server at the client’s premises in accordance with client’s instructions, and provides repair and maintenance services for the server, as needed, throughout the period of use.

Supplier substitutes the server only in the case of malfunction. The client decides which data to store on the server and how to integrate the server within its operations. The client can change its decisions in this regard throughout the period of use.

The contract contains a lease. The client has the right to use the server for three years.

There is an identified asset. The server is explicitly specified in the contract. Supplier can substitute the server only if it is malfunctioning. The client has the right to control the use of the server throughout the three-year period of use because:

  • The client has the right to obtain substantially all of the economic benefits from use of the server over the three-year period of use. The client has exclusive use of the server throughout the period of use.
  • The client has the right to direct the use of the server. The client makes the relevant decisions about how and for what purpose the server is used because it has the right to decide which aspect of its operations the server is used to support and which data it stores on the server. The client is the only party that can make decisions about the use of the server during the period of use.

Example 2 – Contract for scans IFRS 16 – Right to Use

The client enters into a contract with Supplier to purchase a type, quality and quantity of scans for a three-year period. The type, quality and quantity of scans are specified in the contract.

Supplier makes all decisions about the operations of the machine, including the production level at which to run the machine and which the client contracts to fulfill with the output of the machine that is not used to fulfill the client’s contract.

The contract does not contain a lease. IFRS 16 – Right to Use

The machine is an identified asset. The machine is implicitly specified because Supplier can fulfill the contract only using this asset.

The client does not control the use of the machine because it does not have the right to obtain substantially all of the economic benefits from use of the machine. This is because Supplier could decide to use the machine to fulfill other the client contracts during the period of use.

The client also does not control the use of the machine because it does not have the right to direct the use of the machine. The client does not have the right to direct how and for what purpose the machine is used during the three-year period of use. The client’s rights are limited to specifying output from the machine in the contract with Supplier. The client has the same rights regarding the use of the machine as other the clients purchasing scans from the machine. Supplier has the right to direct the use of the machine because Supplier can decide how and for what purpose the machine is used (i.e. Supplier has the right to decide the production level at which to run the machine and which the client contracts to fulfil with the output produced.

Either the fact that the client does not have the right to obtain substantially all of the economic benefits from use of the machine, or that the client does not have the right to direct the use of the machine, would be sufficient in isolation to conclude that the client does not control the use of the machine. IFRS 16 – Right to Use

IFRS 16 – Right to Use

Leave a comment