Article:

IFRS 16 - a closer look at separating lease components

08 May 2017

IFRS 16 requires an entity to account for each lease component within a contract as a lease separately from non-lease components of the contract (paragraphs 12 to 17). 

What is a lease component?

A lease component is part of a contract that contains a lease (ie it conveys the right to control the use of an identified asset for a period of time in exchange for consideration - see the definition of a lease. Anything which doesn’t meet this definition is a non-lease component. To determine whether the right to use an underlying asset is a separate lease component the standard requires both the following two criteria to be met (paragraph B32): 

Criteria

Commentary

Examples

a.) The lessee can benefit from use of the underlying asset either on its own or together with other resources that are readily available to the lessee

Readily available resources are goods or services that are sold or leased separately or resources that the lessee has already obtained. These may be available from the same lessor or another supplier.

A company which leases a van and trailer can easily use either item on its own or lease another van/trailer either from the same supplier or a different one.

b.) The underlying asset is neither highly dependent on, nor highly interrelated with, the other underlying assets in the contract

This relates to whether or not a lessee could decide not to lease the underlying asset without significantly affecting its rights to use other underlying assets in the contract.

Where assets are highly dependent - an organisation leases a credit card machine which will only work with a specific till system from the same supplier.

 

Where they are not – see the van and trailer example above.

 

How should a lessee allocate consideration between lease and non-lease components?

The price of components should be based on the price a lessor, or similar supplier, would charge to purchase that component separately. The standard acknowledges that such information may not always be available and, in these cases, allows the lessee to estimate the stand-alone price (but using as much observable information as possible to make this estimate).  

Are there any practical expedients to make this easier?

Yes, the standard includes a practical expedient for lessees only. This allows organisations to elect to not separate lease and non-lease components and instead account for both as if it were one lease component. An example of where this might be the case is if a company leases a car for £5,000 per year but also pays £200 a year as part of the contract for maintenance. The maintenance element is not a lease component, but because it is a component of a larger contract which contains a lease component the company may elect to apply the practical expedient and therefore treat the whole contract as one lease. 

The expedient may be applied only where it is applied to the entire class of similar assets. In the above example the company could not elect to do this for some cars but not others. This practical expedient is also not applicable to embedded derivatives that meet the criteria in paragraph 4.3.3 of IFRS 9. 

How should a lessor allocate consideration between lease and non-lease components? 

Lessors should allocate consideration between individual lease and non-lease components of a contract in line with IFRS 15’s guidance on allocating the transaction price to performance obligations, ie based on stand-alone selling prices or estimation thereof. The practical expedient mentioned above is not available to lessors.

See also 
IFRS 16 - Definition of a lease
IFRS 16 – a closer look at ‘low value’

For help and advice on accounting for leases please contact Richard Matthews

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