IFRS 16 – Identifying a lease

Unlocking the lease puzzle

When is a contract a lease, or contains a lease, within the scope of IFRS 16?

Identifying a lease

 IFRS 16.9: “At inception of a contract, an entity shall assess whether the contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.”

 The following flow chart provided in IFRS 16 can be used to assist in determining whether a contract is, or contains, a lease:

IFRS 16 Identifying a lease

What is an identified asset?

An asset is an identified asset when it is explicitly specified in the contract (for example the model type, registration or serial number) or being implicitly specified at the time that it is made available for use by the customer. It is not an identified asset if it can be substantively substituted by the supplier throughout the period of use (substantive substitution).

The conditions of substantive substitution include both of the following:

  • The supplier has the practical ability to substitute alternative assets throughout the period of use; and
  • The supplier would benefit economically from the exercise of its right to substitute the asset.

If (a) above is met, it is safe to assume that point (b) will also be met.

It does not necessarily mean that when an asset is replaced, the supplier’s substitution right is substantive. For example, where a customer has a right to have a malfunctioned asset replaced, the supplier does not necessarily have a substantive right to replace the asset. It should also be noted that a substantive substitution right relates to the period through-out the use of the asset and not specified dates.

Customer has the right to obtain substantially all economic benefits from the identified asset throughout the period

A customer controls the identified asset if they have obtained substantially all of the economic benefits from the use of the identified asset throughout the period. Therefore, the customer has exclusive use of the asset throughout the period.

Customer has the right to direct the use of the identified asset

A customer has the right to direct the use of an asset if they can direct “how and for what purpose” the asset is used through the period of use. The following should be considered:

  • Do they have the right to decide the type of output produced by the asset?
  • Do they have the right to decide when and where the output is produced?
  • Do they have the right to decide what quantity is produced?

Wendy Lesch (CA)SA, RA
Email: wendy.l@nexia-sabt.co.za