BLM17015 - IFRS 16 accounting: Identifying a lease

IFRS 16 defines a lease as a contract that “conveys the right to control the use of an identified asset for a period of time in exchange for consideration.” This assessment is conducted at the inception of the contract, and is only reassessed if the terms and conditions of the contract are changed.

An entity is required to assess whether they have:

• the right to obtain substantially all of the economic benefits from use of the identified asset; and

• the right to direct the use of the identified asset.

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.

In circumstances where a lease and related services are combined in one contract, the lessee will normally need to separate the contract into its lease and non-lease components and apply the lease accounting requirements to the lease element only.

There is a practical expedient that allows an entity to not separate the components and instead apply the leasing requirements to the entirety of the contract. This decision can be made by a class of underlying asset.