Right to obtain economic benefits from use

Right to obtain economic benefits from use – To control the use of an identified asset, a customer is required to have the right to obtain substantially all of the economic benefits from use of the asset throughout the period of use (for example, by having exclusive use of the asset throughout that period). A customer can obtain economic benefits from use of an asset directly or indirectly in many ways, such as by using, holding or sub-leasing the asset.

The economic benefits from use of an asset include its primary output and by-products (including potential cash flows derived from these items), and other economic benefits from using the asset that could be realised from a commercial transaction with a third party. Right to obtain economic benefits from use

When assessing the right to obtain substantially all of the economic benefits from use of an asset, an entity shall consider the economic benefits that result from use of the asset within the defined scope of a customer’s right to use the asset (see paragraph IFRS 16 B30). For example: Right to obtain economic benefits from use

  1. if a contract limits the use of a motor vehicle to only one particular territory during the period of use, an entity shall consider only the economic benefits from use of the motor vehicle within that territory, and not beyond. Right to obtain economic benefits from use
  2. if a contract specifies that a customer can drive a motor vehicle only up to a particular number of miles during the period of use, an entity shall consider only the economic benefits from use of the motor vehicle for the permitted mileage, and not beyond. Right to obtain economic benefits from use

Right to obtain economic benefits from use If a contract requires a customer to pay the supplier or another party a portion of the cash flows derived from use of an asset as consideration, those cash flows paid as consideration shall be considered to be part of the economic benefits that the customer obtains from use of the asset.

For example, if the customer is required to pay the supplier a percentage of sales from use of retail space as consideration for that use, that requirement does not prevent the customer from having the right to obtain substantially all of the economic benefits from use of the retail space. This is because the cash flows arising from those sales are considered to be economic benefits that the customer obtains from use of the retail space, a portion of which it then pays to the supplier as consideration for the right to use that space.

EXAMPLE

A customer enters into a contract that conveys the right to use an explicitly specified retail unit for a period of five years. The property owner can require the customer to move into another retail unit; there are several retail units of similar quality and specification available. Right to obtain economic benefits from use

As the property owner has to pay for any relocation costs it can benefit economically from relocating the customer only if there is a new tenant that wants to occupy a large amount of retail space at a rate that is sufficient to cover the relocation costs. Those circumstances may arise, but they are not considered likely to occur. Right to obtain economic benefits from use

The contract requires the customer to sell his goods during the opening hours of the larger retail space. The customer decides on the mix of goods sold, the pricing of the goods sold and the quantities of inventory held. He further controls physical access to the retail unit throughout the five-year period of use. Right to obtain economic benefits from use

The rent that the customer has to pay includes a fixed amount plus a percentage of the sales from the retail unit. Right to obtain economic benefits from use

Is there an identified asset? Right to obtain economic benefits from use

The retail unit is explicitly specified in the contract. The property owner has a right to substitute the asset. But, because it would benefit from the exercise of the right only under certain circumstances that are not considered likely to occur, the substitution right is not substantive.

Hence, the retail unit is an identified asset.

Has the customer the right to obtain substantially all of the economic benefits from the use of the retail unit?

The customer has the exclusive use of the retail unit throughout the period of use. The fact that a part of the cash flows received from the use are passed to the property owner as consideration does not prevent the customer from having the right to substantially all of the economic benefits from the use of the retail unit.

Has the customer the right to direct the use of the retail unit?

During the period of use, all decisions on how and for what purpose the retail unit is used are made by the customer. The restriction that goods can only be sold during the opening hours of the larger retail space defines the scope of the contract, but it does not limit the customer’s right to direct the use of the retail unit.

Conclusion The contract contains a lease of retail space.

See also: The IFRS Foundation

Right to obtain economic benefits from use