Not a lease Concession space – This is a case to obtain an intriguing understanding of the concept of IFRS Leases. Easily understand the definition and characteristics of a lease contract. Looking at the definition of a lease an entity has to assess whether, throughout the period of use (= lease period), the lessee has met the following two rights:
- the right to obtain substantially all of the economic benefits from the use of the identified asset, and
- the right to direct the use of the identified asset.
A few particularities: Not a lease Concession space Not a lease Concession space Not a lease Concession space
- A supplier’s right to substitute an asset is substantive if two options are met (see identified asset). However in situations where the asset is located at the lessee’s premises or elsewhere away from the lessor, the cost to substitute the asset may outweigh any perceived benefit to the lessor (the second option referred to above). Therefore the chance of a substitution right being substantive, and as a result a lease not having to be accounted for as a lease by a lessee, is considered quite remote.
- An asset has to be maintained and during that period a lessee might be considered to NOT have the right to control the asset. No, a supplier’s right to substitute an asset for the purposes of repairs (if the asset is not operating properly) and maintenance (‘preventive’ repairs) or to be upgraded when a technical update becomes due or available, does not mean the lessor has a substantive right of substitution.
- If it is not readily determinable whether the supplier has substantive substitution rights, a lessee must presume that any substitution right is not substantive.
The case: Not a lease – Concession space
A coffee company (Customer) enters into a contract with an airport operator (Supplier) to use a space in the airport to sell its goods for a three-year period. The contract states the amount of space and that the space may be located at any one of several boarding areas within the airport. Supplier has the right to change the location of the space allocated to Customer at any time during the period of use.
There are minimal costs to Supplier associated with changing the space for the Customer: Customer uses a kiosk (that it owns) that can be moved easily to sell its goods. There are many areas in the airport that are available and that would meet the specifications for the space in the contract.
Not a lease Concession space Not a lease Concession space Not a lease Concession space Not a lease Concession space The contract does not contain a lease. Not a lease Concession space The reasoning: Not a lease – Concession space
Although the amount of space Customer uses is specified in the contract, there is no identified asset. Customer controls its owned kiosk. However, the contract is for space in the airport, and this space can change at the discretion of Supplier.
Supplier has the substantive right to substitute the space Customer uses because:
Not a lease Concession space
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