For example, a land easement might be obtained for the right to construct and operate a pipeline or other assets (e.g., railway line, utility pipes or telecommunication lines) over, under or through an existing area of land or body of water while allowing the landowner continued use of the land for other purposes (e.g., farming), as long as the landowner does not interfere with the rights conveyed in the land easement.
Perpetual easements are outside the scope of IFRS 16, as the definition of a lease requires the contract to be for a period of time. Therefore, entities must carefully evaluate easement contracts to determine whether the contract is perpetual or for a period of time. Examples of contracts that may appear perpetual but are term-based include:
- Very long-term contracts (e.g., the FASB indicated in the Basis for Conclusions (BC113) that very long-term leases of land (e.g., 999 years) are in the scope of ASC 842 Lease accounting)
- Contracts with a stated non-cancellable lease term that “automatically renews” if the lessee pays a periodic renewal fee. This is an in-substance fixed term contract with optional renewal periods
- Contracts that define the period of use as the period over which the assets are used (e.g., as long as natural gas flows through a gathering system) is a fixed term contract (i.e., terminated when production ceases) rather than a perpetual contract because the gas reserves will ultimately be depleted
When determining whether a contract for a land easement or right of way is a lease, entities will need to assess whether there is an identified asset and whether the customer obtains substantially all of the economic benefits of the identified asset and has the right to direct the use of that asset throughout the period of use, as follows:
Example A: A leased warehouse is situated on land that is also subject to a right to use agreement for the land. The lessee does not obtain ownership or title to the underlying land and must make payment to the landowner for the use of the land each year. Land easements
Example B: A pipeline runs under a farmer’s field. The pipeline entity has a right-of-way to access the property for building and maintaining the pipeline. The farmer can continue to utilize the land above the pipeline for growing crops but cannot build any structures on the land over the pipeline. Land easements Land easements
Example A appears to meet the definition of a lease because the arrangement conveys a right to control the use of the land for a period of time in exchange for consideration. The lessee has the right to obtain substantially all of the economic benefits from the use of the land and the right to direct the use of the land.
Example B differs from Example A because the arrangement does not convey the right to control the use of the land for a period of time. The farmer has the right to obtain substantially all of the economic benefits from the use of the land and the right to direct the use of the land.
In many cases, the critical factor would be whether or not the easement holder has exclusive use of a defined space or whether the land owner has significant economic benefits beyond the easement.
Landowner mineral leases for mining rights are specifically exempt from IFRS 16; however, surface-land leases and similar rights-of-way contracts are not specifically exempt. Judgment must be applied to determine whether the surface-land lease should be accounted for in a manner consistent with the related mineral leases. In making this determination, questions to consider, include but are not limited to:
- Does the surface-land lease specifically cover both surface-land and subsurface mineral rights? Land easements
- Does the surface-land lease provide any economic benefit other than allowing access to explore for or use the mineral rights? Land easements
- Is there legislation that compels the surface-landowners to grant access to the mineral rights? Land easements
Additionally, for land easements and similar contracts, judgment will be required to determine if the mining entity obtains substantially all of the economic benefits from use of the land subject to the easement. In many cases, rights to use roadways or place certain infrastructure on land may not give the mining entity the ability to obtain substantially all of the economic benefit of the associated land, which may have ongoing alternative uses for the landowner.
Based on the specific facts and circumstances, the contract would probably not be considered a lease under IFRS 16.
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