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Identifying a Lease
as announced in our January newsletter, we are addressing issues surrounding IFRS 16 Leasing in a short newsletter series. The previous newsletters have dealt with the following topics:
- January 2021: “Has the plane landed – Introduction to our IFRS 16 series”
- February 2021: “IFRS 16: Scope and Exemptions”
In today´s newsletter, we focus on identifying a lease under IFRS 16.
If identifying leases under the ‘old’ IAS 17 was not always easy – even top-flight leasing experts had problems with the ‘embedded leases‘ that were the subject of the related interpretation, IFRIC 4 – it has not really become much easier to determine whether (or not) there is a lease in some specific cases for the purposes of IFRS 16. Extensive and detailed stipulations can be found in IFRS 16.9-11 in conjunction with B9-B33. At this point, just take a quick look at the flowchart in IFRS 16.B31.
Not exactly self-explanatory, is it!?!? To give you a general idea, how and where the specific problem areas are likely to turn up in practice, take a look at the following examples provided by the IASB to distinguish between a ‘lease’ and a ‘service’ (non-lease) in IFRS 16.IE 2 (our emphasis):
Example 10 – Contract for network services
Example 10A: Customer enters into a contract with a telecommunications company (Supplier) for network services for two years. The contract requires Supplier to supply network services that meet a specified quality level. In order to provide the services, Supplier installs and configures servers at Customer’s premises—Supplier determines the speed and quality of data transportation in the network using the servers. Supplier can reconfigure or replace the servers when needed to continuously provide the quality of network services defined in the contract. Customer does not operate the servers or make any significant decisions about their use.
Example 10B: Customer 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 Customer’s premises in accordance with Customer’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. Customer decides which data to store on the server and how to integrate the server within its operations. Customer can change its decisions in this regard throughout the period of use.
The two examples differ significantly in substance, hence the accounting outcome is also different. In Example 10a, the IASB concludes that the contract is not a lease but a service contract. In Example 10b, on the other hand, the IASB considers the contract to be a lease because the customer controls the identified asset, the server.
As you can see at this point, far from being always black and white, the cases encountered in practice can include a large grey area and hence scope for judgement.
Should you ever lose track of the big picture, my colleagues and I will be happy to help and guide you safely through the IFRS accounting jungle. Contact me by email at firstname.lastname@example.org