IFRS 16 Right to use

IFRS 16 Right to use – throughout the period of use the lessee has to meet the following two rights: IFRS 16 Right to use

  1. the right to obtain substantially all of the economic benefits from the use of the identified asset, and IFRS 16 Right to use
  2. the right to direct the use of the identified asset. IFRS 16 Right to use


To start simple….. IFRS 16 Right to use

  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 IFRS 16 Right to use
  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.Server

Example – 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. IFRS 16 Right to 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. IFRS 16 Right to use

The contract contains a lease. The client has the right to use the server for three years. IFRS 16 Right to use

Consider this! IFRS 16 Right to use

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.
Something else -   Take 1 stop for best read - Measurement uncertainty

Example – Contract for scans (?) LeaseIFRS 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.

Consider this!

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.

Something else -   Leases capitalisation on the balance sheet

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.

CALCULATION EXAMPLE

The contract

The lease contract has a lease term of 12 consecutive years (144 months), starting date is 1 March 2015, ending date is 28 February 2027. Tacit renewal of the agreement for a definite period of time, such as with six months or a year, is not possible. Renewal can only be done by agreeing a new contract.

Summary of the contract:

Office space: 1,174 m2 at €135/m2 per annum =

158,940

Archive: 102 m2 at €50/m2 per annum =

5,100

Inside garage 29 lots at € 1,00 per annum =

31,900

Outside 6 parking lots at € 750 per annum =

4,500

Total =

199,990

Recognition asset and liability

The net present value is therefore € 2,154,990.20 (see below). This is the amount of the lease liability at the commencement of the lease contract, which is also the amount to record the right-to-use asset.

Right-to use asset DT 2,154,990.20

Lease liability                                     CR 2,154,990,20

Net present value of a lease contract calculation sheet

Depreciation of the use of right asset

As at 31 December 2015 the use of right asset has to be depreciations for 10 months. The monthly depreciation charge is calculated as follows:

Something else -   Best focus on IFRS 16 Leases

 2,154,990.20 (see above cost) / 144 months (lease term) = 14,965.21, ten months is then: 149,652.10.

Depreciation right to use asset PNL     DT      149,652.10

Right-to use asset BS                                                               CR            149,652.10

IFRS 16 Right to use

Annualreporting provides financial reporting narratives using IFRS keywords and terminology for free to students and others interested in financial reporting. The information provided on this website is for general information and educational purposes only and should not be used as a substitute for professional advice. Use at your own risk. Annualreporting is an independent website and it is not affiliated with, endorsed by, or in any other way associated with the IFRS Foundation. For official information concerning IFRS Standards, visit IFRS.org or the local representative in your jurisdiction.

Something else -   Post-contract support services

Leave a comment