In-substance fixed lease payments

Lease payments include any in-substance fixed lease payments. In-substance fixed lease payments are payments that may, in form, contain variability but that, in substance, are unavoidable. In-substance fixed lease payments exist, for example, if:

  • payments are structured as variable lease payments, but there is no genuine variability in those payments. Those payments contain variable clauses that do not have real economic substance. Examples of those types of payments include:
    • payments that must be made only if an asset is proven to be capable of operating during the lease, or only if an event occurs that has no genuine possibility of not occurring; or
    • payments that are initially structured as variable lease payments linked to the use of the underlying asset but for which the variability will be resolved at some point after the commencement date so that the payments become fixed for the remainder of the lease term. Those payments become in-substance fixed payments when the variability is resolved.
  • there is more than one set of payments that a lessee could make, but only one of those sets of payments is realistic. In this case, an entity shall consider the realistic set of payments to be lease payments. In-substance fixed lease payments
  • there is more than one realistic set of payments that a lessee could make, but it must make at least one of those sets of payments. In this case, an entity shall consider the set of payments that aggregates to the lowest amount (on a discounted basis) to be lease payments.
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[IFRS 16 B42]


Use in IFRS 16 Leases: In-substance fixed lease payments

In-substance fixed payments are used in:

  • measurement at initial recognition of the lease liability [IFRS 16 27]
  • subsequent measurement of the lease liability [IFRS 16 36(c)]
  • initial measurement of the lease payments included in the net investment in the lease [IFRS 16 70(a)]
  • the determination of the lease term in case of an option to extend or terminate a lease [IFRS 16 B38]

Example – Minimum lease payment with no commercial substance

R, an established retailer, leases space for a store within a mature retail development from Company Q. Under the terms of the lease, R is required to operate the store during normal working hours. R is not permitted to leave the store vacant or to sub-let the store. In-substance fixed lease payments

The contract states that the annual rentals payable by R will be:

  • 100 if R makes no sales at the store; or In-substance fixed lease payments
  • 1 million if R makes any sales at the store during the term of the lease.

R concludes that the lease contains in-substance fixed lease payments of 1 million per annum. R notes that this amount is not a variable payment that depends on sales. This is because there is no realistic possibility that R will make no sales at the store. R is an established retailer and has agreed to operate the store during normal working hours.

Examples in-substance fixed lease payments

Examples of payments lacking genuine variability include:

  • payments that must be made only if an event occurs that has no genuine possibility of not occurring
  • payments that must be made only if an asset is proven to be capable of operating during the lease
  • payments that are initially structured as variable lease payments linked to the use of an underlying asset, but for which the variability will be resolved after the commencement date such that the payments become fixed for the remainder of the term (in this case the payments become in-substance fixed and are included in the lease liability only once the variability is resolved).
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The above examples are all variable in legal form but should be treated as in-substance fixed.

Case – Minimum lease payments with more than one set of payments

P is an established Motorway Service Area operator. P leases a Motorway Service Area and under the terms of the lease, P must keep the Service Area open 24 hours per day and cannot sublease the Service Area. Annual rentals are payable under the contract as follows:

  • CU100,000 if no sales are made at the service area; or
  • CU10,000,000 if any sales are made during the year.

P concludes that the lease contains in-substance fixed lease payments of CU10,000,000 per annum, on the basis that there is no realistic possibility that P will make no sales at the Service Area, as P is an established Motorway Service Area operator, with a history of successful operations.

In-substance fixed lease payments

In-substance fixed lease payments

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