www.pwc.com/ifrs The Leases Lab

Hypothesis

All elements contained within a lease agreement relate to the lease and so are within the scope of IFRS 16. There is no need to worry about applying other standards.

Testing and analysis

Contracts often combine different types of Lessees allocate consideration based on: obligations for suppliers. These might be a  the relative stand-alone price of each combination of lease components, or of IFRS 16 contains new lease component; and lease and non-lease components. guidance on  the aggregate stand-alone price of the non-lease components. IFRS 16 requires each separate lease separating lease The prices are determined based on the component to be identified and accounted components from price a lessor or similar supplier would for separately. other lease charge for that component separately. If observable prices are not readily Interaction with IFRS 15 components to be available, a lessee should estimate the considered by both price maximising the use of observable The right to use an is a separate information. lessees and lessors. lease component from other lease Can Professor Lee components if two criteria are met: ————————————————————— Lessors allocate consideration in Singh and his 1. The lessee can benefit from accordance with IFRS 15, on the basis of assistant Derek the use of the asset either on stand-alone selling prices. its own or together with other Carmichael help you readily-available resources. separate the truth 2. The underlying asset must not Practical expedient from the fiction? Let’s be highly dependent on or Lessees are allowed not to separate lease highly interrelated with experiment! other underlying in the and non-lease components and instead contract. account for both as a single lease compo- nent. This policy choice needs to be made The criteria are similar to those in IFRS 15 by class of underlying asset. from contracts with customers for IFRS 16 does not provide a practical expe- analysing whether goods or services dient for lessors. provided to customers are distinct. Practical application For multiple-element arrangements that contain a lease, lessors must perform an If components are not separated, a lessee assessment to identify whether there are will recognise a higher lease liability and so multiple lease components using the IFRS it’s likely this expedient will be used only 16 guidance. where service components are not signifi- cant. Any non-lease components are assessed In practice, this means that lessees will under IFRS 15 for separate performance need to consider the application of other obligations. standards. Allocation of consideration Conclusion When the identification of components has been completed, the consideration within IFRS 16 requires a lessee to account for the contract must then be allocated. each lease component in a contract sepa- rately from non-lease components, unless IFRS 16 provides guidance for both lessees the lessee applies the practical expedient to and lessors. account for lease and non-lease compo- Subsequent measurement nents as one lease. Lease components are accounted for in For more on separation of compo- accordance with IFRS 16. nents, see our In depth, IFRS 16 – A Non-lease components are accounted for new era of lease . You by applying other relevant standards. For might also find our video series help- ful. example, a lessor would account for non- lease service components using IFRS 15. IFRS news - April 2017 4