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Leases

Leases

1.1 Definitions

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

The lessor is the entity that provides the right-of-use asset and, in
exchange, receives consideration.

The lessee is the entity that obtains use of the right-of-use asset and, in
exchange, transfers consideration.

A right-of-use asset represents the lessee's rights to use an underlying
asset over the lease term.

1.2 Identifying a lease

IFRS 16 Leases requires lessees to recognise an asset and a liability unless the
lease is short-term or of a minimal value.

As such, it is important to assess if a contract contains a lease or whether it is simply
a contract for a service.

A contract contains a lease if it conveys the ‘right to control the use of an
identified asset for a period of time in exchange for consideration’
(IFRS 16, para 9).

For this to be the case, the contract must give the customer:

 the right to substantially all of the identified asset’s economic benefits

 the right to direct the identified asset’s use.

The right to direct the use of the asset can still exist if the lessor puts restrictions on
its use in a contract. These restrictions define the scope of a customer’s right of use.

A customer does not have the right to use an identified asset if the supplier has the
practical ability to provide an alternative asset and if it would be economically
beneficial for them to do so.

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