Identified asset – 2 Complete with comprehensive examples

Identified asset

a term from IFRS 16 Leases. Let’s see what it is all about….

A lease is a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration.

The key factors to consider when applying the lease definition are as follows.

Identified asset

1. Specified asset

An asset can be either explicitly specified in a contract (e.g. by a serial number or a specified floor of a building) or implicitly specified at the time it is made available for use by the customer. (IFRS 16.B13, IFRS 16.BC111)

Food for thought – What does ‘implicitly specified’ mean?

An asset is implicitly specified if the facts and circumstances indicate that the supplier can fulfil its obligations only by using a specific asset. This may be the case if the supplier has only one asset that can fulfil the contract. For example, a power plant may be an implicitly specified asset in a power purchase contract if the customer’s facility is in a remote location with no access to the grid, such that the supplier cannot buy the required energy in the market or generate it from an alternative power plant.

In other cases, an asset may be implicitly specified if the supplier owns a number of assets with the required functionality, but only one of those assets can realistically be supplied to the customer within the contracted time-frame – i.e. the supplier does not have a substantive right to substitute an alternative asset to fulfil the contract – see 3.3. For example, a supplier may own a fleet of vessels but only one vessel that is in the required geographic area and not already being used by other customers.

1.1 Capacity portions

Read more

9 Essential Leases and No leases examples

9 Essential Leases and no leases examples

– shows the difference between cases of entities involved in contracts containing a lease under IFRS 16 Leases and similar but different cases of entities involved in contracts NOT containing a lease under IFRS 16 Leases.

To start setting the stage, the definition of a lease: A contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration.

1. Lease Rail cars

The case
A contract between Customer and a freight carrier (Supplier) provides Customer with the use of 10 rail cars of a particular type for five years. The contract specifies the rail cars; the cars are owned by Supplier. Customer determines when, where and which goods are to be transported using the cars. When the cars are not in use, they are kept at Customer’s premises. Customer can use the cars for another purpose (for example, storage) if it so chooses.

However, the contract specifies that Customer cannot transport particular types of cargo (for example, explosives). If a particular car needs to be serviced or repaired, Supplier is required to substitute a car of the same type. Otherwise, and other than on default by Customer, Supplier cannot retrieve the cars during the five-year period.

The contract also requires Supplier to provide an engine and a driver when requested by Customer. Supplier keeps the engines at its premises and provides instructions to the driver detailing Customer’s requests to transport goods. Supplier can choose to use any one of a number of engines to fulfil each of Customer’s requests, and one engine could be used to transport not only Customer’s goods, but also the goods of other customers (ie if other customers require the transportation of goods to destinations close to the destination requested by Customer and within a similar timeframe, Supplier can choose to attach up to 100 rail cars to the engine).

Read more

Right to control the use of the identified asset in IFRS 16 – Best read

Right to control the use of the identified asset – A contract conveys the right to control the use of an identified asset for a period of time if, throughout the period of use, the customer has 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.

Right to obtain substantially all of the economic benefits from use of the identified asset

A customer can obtain economic benefits either directly or indirectly (e.g., using, holding or subleasing the asset). Economic benefits include the asset’s primary outputs (i.e., goods or services) and any by-products (e.g., renewable energy credits that are generated through use … Read more

IFRS 16 Right to direct the use of the identified asset

IFRS 16 Right to direct the use of the identified asset

Requiring a customer to have the right to direct the use of an identified asset is a change from IFRIC 4. A contract may have met IFRIC 4’s control criterion if, for example, the customer obtained substantially all of the output of an underlying asset and met certain price-per-unit-of-output criteria even though the customer did not have the right to direct the use of the identified asset as contemplated by IFRS 16. Under IFRS 16, such arrangements would no longer be considered leases [IFRS 16 B24]

A customer has the right to direct the use of an identified asset throughout the period of use when either: IFRS Read more