Lease

IFRS 16 Leases: 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.

Other definitions from IFRS 16 Leases are:


Lease payments – Payments made by a lessee to a lessor relating to the right to use an underlying asset during the lease term, comprising the following:

  1. fixed payments (including in-substance fixed payments), less any lease incentives;
  2. variable lease payments that depend on an index or a rate;
  3. the exercise price of a purchase option if the lessee is reasonably certain to exercise that option; and
  4. payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an option to terminate the lease.

For the lessee, lease payments also include amounts expected to be payable by the lessee under residual value guarantees. Lease payments do not include payments allocated to non-lease components of a contract, unless the lessee elects to combine non-lease components with a lease component and to account for them as a single lease component.

For the lessor, lease payments also include any residual value guarantees provided to the lessor by the lessee, a party related to the lessee or a third party unrelated to the lessor that is financially capable of discharging the obligations under the guarantee. Lease payments do not include payments allocated to non-lease components.

Fixed payments – Payments made by a lessee to a lessor for the right to use an underlying asset during the lease term, excluding variable lease payments.


Lease term – The non-cancellable period for which a lessee has the right to use an underlying asset, together with both: Lease

  1. periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option; and Lease
  2. periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option. Lease

Contingent rent – That portion of the lease payments that is not fixed in amount, but is based on the future amount of a factor that changes other than with the passage of time (e.g., percentage of future sales, amount of future use, future price indices, future market rates of interest).


Inception date of the lease – The earlier of the date of a lease agreement and the date of commitment by the parties to the principal terms and conditions of the lease. [IFRS 16 9]

IFRS 16 requires customers and suppliers to determine whether a contract is or contains a lease at the inception of the contract. The inception date of a lease is the earlier of the date of a lease agreement and the date of commitment by the parties to the principal terms and conditions of the lease.

As indicated in the Basis for Conclusions (BC 72), after the inception of the lease, but before the commencement date (see below), the requirements in IAS 37 Provisions, Contingent Liabilities and Contingent Assets apply to any contract (and, hence, any lease contract) that becomes onerous as defined in that standard.


Lease modifications – A change in the scope of a lease, or the consideration for a lease, that was not part of the original terms and conditions of the lease (for example, adding or terminating the right to use one or more underlying assets, or extending or shortening the contractual lease term).


Lease incentives – Payments made by a lessor to a lessee associated with a lease, or the reimbursement or assumption by a lessor of costs of a lessee.


Lessor one that owns a property and transfers the property use (such as a house or factory) by a lease contract, also called landlord.

Gross investment in the lease – The sum of:

  1. the lease payments receivable by a lessor under a finance lease, and
  2. any unguaranteed residual value accruing to the lessor.

Lessee – One that holds real or personal property under a lease, also called renter or tenant

Lessee’s incremental borrowing rate – The rate of interest that a lessee would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment.

Guaranteed residual value – the two perspectives:

  • For a lessee, that part of the residual value that is guaranteed by the lessee or by a party related to the lessee (the amount of the guarantee being the maximum amount that could, in any event, become payable); and
  • For a lessor, that part of the residual value that is guaranteed by the lessee, or by a third party unrelated to the lessor, that is financially capable of discharging the obligations under the guarantee.

Initial direct costs – Incremental costs of obtaining a lease that would not have been incurred if the lease had not been obtained, except for such costs incurred by a manufacturer or dealer lessor in connection with a finance lease.


Incremental borrowing rate – The rate of interest that a lessee would have to pay to borrow over a similar term, and with a similar security, the  funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment.

Interest rate implicit in the lease – the rate of interest that causes the present value of:

  1. the lease payments, and
  2. the unguaranteed residual value to equal the sum of
    1. the fair value of the underlying asset, and
    2. any initial direct costs of the lessor.

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