Basis For Conclusions On IFRS 16 Identified Asset

Basis For Conclusions On IFRS 16 Identified Asset :The first requirement for a contract to meet the definition of a lease in IFRS 16 is that a customer should control the use of an identified asset. The requirement for an identified asset is substantially the same as the requirement in IFRIC 4 for the contract to depend on the use of a specified asset. It is important to know what the asset is in order to assess whether the customer has the right to control the use of that asset and, for example, to determine which asset finance lessors should derecognise. Nonetheless, when assessing at the inception date whether there is an identified asset, an entity does not need to be able to identify the particular asset (for example, a specific serial number) that will be used to fulfil the contract to conclude that there is an identified asset. Instead, the entity simply needs to know whether an identified asset is needed to fulfil the contract from commencement. If that is the case, then an asset is implicitly specified. IFRS 16 clarifies that an asset can be implicitly specified at the time that the asset is made available for use by the customer.

Basis For Conclusions On IFRS 16 Identified Asset

Basis For Conclusions On IFRS 16 Identified Asset :IFRS 16 includes requirements on asset substitution. If a supplier has a substantive right to substitute the asset throughout the period of use, then there is no identified asset and the contract does not contain a lease. This is because the supplier (and not the customer) controls the use of an asset if it can
substitute the asset throughout the period of use.

Basis For Conclusions On IFRS 16 Identified Asset

Basis For Conclusions On IFRS 16 Identified Asset :IFRS 16 defines a lease on the basis of whether a customer controls the use of an identified asset for a period of time, which may be determined by a defined amount of use. If the customer controls the use of an identified asset for a period of time, then the contract contains a lease. This will be the case if the customer can make the important decisions about the use of the asset in a similar way to that in which it makes decisions about owned assets that it uses. In such cases, the customer (the lessee) has obtained the right to use an asset (the right-of-use asset) that it should recognise in its balance sheet (subject to the recognition exemptions of IFRS 16). In contrast, in a service contract, the supplier controls the use of any assets used to deliver the service.

Basis For Conclusions On IFRS 16 Identified Asset

Basis For Conclusions On IFRS 16 Identified Asset : The 2010 Exposure Draft essentially retained the definition of a lease in IAS 17 and the accompanying requirements in IFRIC 4. Many respondents expressed concerns about the population of contracts that would be captured by the proposed requirements (and in particular that some contracts that they viewed as service contracts would be captured). Respondents also identified practice issues with IFRIC 4, such as difficulties in assessing the pricing structure of a contract, and questioned why the control criteria used in IFRIC 4 to define a lease were different from the control proposals that were then being developed within the context of revenue recognition and the control principle in IFRS 10 Consolidated Financial Statements.

Basis For Conclusions On IFRS 16 Identified Asset

Basis For Conclusions On IFRS 16 Identified Asset : Accordingly, in the 2013 Exposure Draft, the IASB proposed changes to the guidance on the definition of a lease to address those concerns. The 2013 Exposure Draft proposed using a control principle as the means of distinguishing between a service and a lease, and to align the principle with that
in other Standards. Respondents generally supported these changes. However, many respondents stressed the increased importance of the definition of a lease, noting that the assessment of whether a contract contains a lease would generally determine whether a customer would recognise lease assets and lease liabilities. Some of these respondents thought that the IASB had not provided adequate guidance to support consistent application of the proposed definition to more complicated scenarios.

Basis For Conclusions On IFRS 16 Identified Asset

Basis For Conclusions On IFRS 16 Identified Asset :Accordingly, IFRS 16 generally retains the approach to the definition of a lease that was proposed in the 2013 Exposure Draft, but makes a number of changes to clarify the IASB’s intentions and reduce the risk of inconsistent application.

Basis For Conclusions On IFRS 16 Identified Asset

Basis For Conclusions On IFRS 16 Identified Asset :The IASB is of the view that, in most cases, the assessment of whether a contract contains a lease should be straightforward. A contract will either fail to meet the definition of a lease by failing to meet many of the requirements or will clearly meet the requirements to be a lease without requiring a significant
amount of judgement. However, application guidance has been added to make it easier for entities to make the lease assessment for more complicated scenarios.

Basis For Conclusions On IFRS 16 Identified Asset

Basis For Conclusions On IFRS 16 Identified Asset : IFRS 16 requires an entity to assess whether a contract contains a lease at inception of the contract, rather than at commencement. This is because a lessor is required to classify a lease as either a finance lease or an operating lease at the inception date; this is consistent with the previous lessor lease classification requirements in IAS 17, which the IASB decided not to change. In addition, a lessee is required to disclose information about leases not yet commenced to which the lessee is committed if that information is relevant to users of financial statements.

Basis For Conclusions On IFRS 16 Identified Asset

Basis For Conclusions On IFRS 16 Identified Asset :

Short-term leases

The IASB concluded that the benefits of requiring a lessee to apply all of the requirements in IFRS 16 to short-term leases do not outweigh the associated costs. In considering how to reduce the costs for lessees, the IASB considered both the nature and the scope of a possible exemption.

Basis For Conclusions On IFRS 16 Identified Asset

Basis For Conclusions On IFRS 16 Identified Asset : 

Nature of the exemption

The IASB considered simplifying the measurement requirements for short-term leases. Specifically, it considered exempting lessees from the requirement to discount the payments used to measure the assets and liabilities arising from short-term leases. Many stakeholders, however, thought that this exemption would provide insufficient cost relief for lessees because it would still require an entity to track a possibly large volume of leases of a low value.

Basis For Conclusions On IFRS 16 Identified Asset

Basis For Conclusions On IFRS 16 Identified Asset : The IASB concluded that, even with simplified measurement requirements, the benefits of requiring a lessee to recognise right-of-use assets and lease liabilities for short-term leases would not outweigh the associated costs. Consequently, of IFRS 16 permits a lessee to elect not to apply the recognition requirements to short-term leases. Instead, a lessee can recognise the lease  payments associated with short-term leases as an expense over the lease term, typically on a straight-line basis. The IASB decided that this choice should be made by class of underlying asset.

Basis For Conclusions On IFRS 16 Identified Asset

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