Identifying a lease

Under paragraph 9 of AASB 16 Leases (AASB 16), a contract is a lease, or contains a lease, if the contract conveys the right to control the use of an identified asset for a period of time, in exchange for consideration. The customer would only have the right to control the use of an identified asset where they have both the right to:

  • obtain substantially all of the economic benefits from use of the identified asset
  • direct the use of the identified asset.
AASB 16 extract:
Paragraph B13: An asset is typically identified by being explicitly specified in a contract. However, an asset can also be identified by being implicitly specified at the time that the asset is made available for use by the customer.

As noted in paragraph B13 of AASB 16, an asset is typically identified by being explicitly specified in a contract, but may also be implicitly identified. Under paragraph B20 of AASB 16, a capacity portion of an asset would only be an identified asset if it is physically distinct. For example, computer workstations within a particular building location specified in a contract may be implicitly identified assets in a sublease arrangement, if the workstations are a physically distinct group.

Under paragraph B14 of AASB 16, even where an asset is specified, a customer does not have the right to use an identified asset if the supplier has the substantive right to substitute the asset throughout the period. This would only occur if the supplier both:

  • has the practical ability to substitute alternative assets
  • could benefit economically from substituting the asset throughout the period of use.

For more information on:

  • assessing if a contract is, or contains, a lease, see paragraphs B9–B31 of AASB 16
  • the identification of lease arrangements, see IFRS 16 Illustrative Examples 1 – 10.
Note 1: Identification of a lease

Contracts only contain a lease if the contract both:

  • conveys the right to control the use of an identified asset for a period of time
  • requires an exchange of consideration.


Separating lease components

AASB 16 extract:
Paragraph B32: The right to use an underlying asset is a separate lease component if both:
  1. the lessee can benefit from use of the underlying asset either on its own or together with other resources that are readily available to the lessee. Readily available resources are goods or services that are sold or leased separately (by the lessor or other suppliers) or resources that the lessee has already obtained (from the lessor or from other transactions or events); and
  2. the underlying asset is neither highly dependent on, nor highly interrelated with, the other underlying assets in the contract. For example, the fact that a lessee could decide not to lease the underlying asset without significantly affecting its rights to use other underlying assets in the contract might indicate that the underlying asset is not highly dependent on, or highly interrelated with, those other underlying assets.

Entities may have a contract with separate lease components only where the underlying assets are not closely related.

Example: Separate lease components

Multiple floors in a leased building would normally be considered related, where it is important for the entity’s staff to be co-located. In such cases, the leased floors would usually be accounted for as a single lease rather than as separate lease components.

For more information on separating lease components within a contract, see paragraphs 12-16 and B32–B33 of AASB 16.

Note 2: Separating lease components

Contracts would only contain separate lease components where the underlying assets are not closely related.


Separating lease and non-lease components

Under paragraph 12 of AASB 16, where a contract is or contains a lease, entities are required to account for each lease component within the contract separately from any non-lease components, unless the practical expedient in paragraph 15 of AASB 16 is applied. Contract consideration should be allocated based on the stand-alone prices of the lease and non-lease components. Non-lease components should be accounted for under relevant standards.

AASB 16 extract:
Paragraph 15 As a practical expedient, a lessee may elect, by class of underlying asset, not to separate non-lease components from lease components, and instead account for each lease component and any associated non-lease components as a single lease component. A lessee shall not apply this practical expedient to embedded derivatives that meet the criteria in paragraph 4.3.3 of AASB 9 Financial Instruments.

Commonwealth entities may only apply the single lease practical expedient when the non-lease component is assessed to be immaterial to the lease. This is to ensure that at a whole of government level, the recognition of non-lease components does not significantly alter lease measurement and associated expenses.

For more information on separating lease and non-lease components within a contract, see paragraphs 9-16 and B9–B33 of AASB 16.

Note 3: Separating lease and non-lease components

The single lease practical expedient, which combines the lease component and the non-lease component, must only be used by Commonwealth lessees when the non-lease component is considered immaterial to the lease.


Short-term and low value exemptions

Under paragraph 5 of AASB 16, a lessee may elect not to comply with AASB 16 lease recognition requirements for:

  • short-term leases (ie. a lease that has a lease term of 12 months or less at the commencement date)
  • leases for which the underlying asset is of low value.

Instead, the lessee would recognise the lease payments associated with those leases as an expense on either:

  • a straight-line basis over the lease term
  • another systematic basis in accordance with paragraph 6 of AASB 16.

The exemptions, under paragraph 5 of AASB 16, reduce the administrative burden in implementing AASB 16. The election for:

  • the short-term lease exemption must be made based by class of ROU asset
  • low value leases can be made on a lease-by-lease basis, in accordance with paragraph 8 of AASB 16.

Low value is based on the value of individual assets when new. It is an absolute concept not related to an entity’s materiality threshold. Finance has determined a low value of AUD$10,000 per asset, consistent with the Basis for Conclusions in IFRS 16.

For more guidance on low value assets, see paragraphs B3-B8 of AASB 16.

Note 4: Short term and low value exemptions
Commonwealth entities are required to apply the ‘short-term’ or ‘low value’ exemption in accordance with AASB 16. Low value will be assets of AUD$10,000 or less.


Intangible assets

AASB 16 extract:
Paragraph 4: A lessee may, but is not required to, apply this Standard to leases of intangible assets other than those described in paragraph 3(e).

Paragraph 4 of AASB 16 enables lessees to not apply AASB 16 to intangible assets. Commonwealth entities are to select this application option.

Note 5: Intangible assets
Commonwealth lessees are not to apply AASB 16 to intangible assets.

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