IFRS 16 -Lease components Separation

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E.Reis
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IFRS 16 -Lease components Separation

Post by E.Reis »

I need assistance regarding IFRS 16 on Lease components separation on a lessee perspective.

I have a situation concerning the lease of a building fully equipped.
The right to use an underlying asset is a separate lease component if the criteria from (IFRS 16.B32) are met.

1)Does the criteria entails judgement to separate a lease in 3 components ( land, building and equipment) and how to allocate the lease consideration to each component?

2)If so, does one recognize 3 rights of use assets and a single lease liability?
PS:
( I didn't see an example in the knowledge base regarding this, therefore my questions).

Thank you in advance
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Marek Muc
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Re: IFRS 16 -Lease components Separation

Post by Marek Muc »

Hi, I think the judgement here is the question of whether the criteria in IFRS 16.B32 are met. When it comes to land and buildings, I would argue that they are not separate lease components from the lessee perspective, as none of the two criteria in IFRS 16.B32 are met, especially for the building.

When it comes to equipment vs. building, many pieces of equipment would need to be separated strictly speaking, but materiality considerations come into play. Thus I would separate only specialised and costly equipment. For example, when a medical company leases a building together with medical equipment.

If you decide to separate lease components, then I believe that the right-of-use asset and lease liability should be accounted for separately.
See also allocating lease consideration to separate components.

What are your views on this?
E.Reis
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Re: IFRS 16 -Lease components Separation

Post by E.Reis »

Hi
Thank you for the insights.

I concur with the idea to not separate the land and building, and treat such as a single right of use asset, but when it comes to depreciation I wouldn't depreciate the fraction that might be imputable to the land.

Considering building and equipment there is guidance to separate the lease components per underlying asset category (furniture, electronics, computers, etc) as you showed through the provided link, which Ialso tend to agree .

In the end there would be as many lease liabilities as there is separated lease components.

Once again, thank you for sheding some light on this particular subject.
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Marek Muc
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Re: IFRS 16 -Lease components Separation

Post by Marek Muc »

re. depreciation - you must depreciate the part attributable to land as well, you're not the owner of the land as a lessee, but you recognise only the right-of-use of land, which is granted under the lease contract for finite period
E.Reis
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Re: IFRS 16 -Lease components Separation

Post by E.Reis »

Even if you are to acquire the underlying assets at the end of lease?

This is interesting beacuse according §32 of IFRS16 one applies IAS 16 to depreciate the right of use asset, and according to B32 of IFRS 16 it does not make sense to separate the land and the building.
But IAS 16 §58 , states that land and building are separable assets and one does note depreciate land ( excluding landfills and mines) because they have and indefinite life.

My take here is this:
To not separate land and building according to IFRS 16 B32 and depreciate only the fraction allocated to building according to IAS 16.

It's a bit incongruent but I take this approach because there is a certainty to acquire the assets at the end of the lease.
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Marek Muc
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Re: IFRS 16 -Lease components Separation

Post by Marek Muc »

OK so you're saying that the conditions set out in IFRS 16.32 are met, i.e. the lease transfers ownership or the cost of the right-of-use asset reflects that the lessee will exercise a purchase option?
then yes - it appears that the part attributable to land should not be depreciated. To reconcile these two standards, I would add that IAS 16 requires separate depreciation of significant parts (IAS 16.43). We can say that the right-of-use asset consists of separate parts :)
E.Reis
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Re: IFRS 16 -Lease components Separation

Post by E.Reis »

Exactly.
Precious information ;) .
E.Reis
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Re: IFRS 16 -Lease components Separation

Post by E.Reis »

Hey
I'm back again

I have this doubt.
Let's say we enter to lease a fully equipped ( office equipment, etc) building for a term of 30 years and 3 mil. per year payment
There is a real estate component and ther is office equipment component.

The law states that for real estate leases the maximum term is 30 years and equipmemt leases the maximium term is 7 years.
Is required to separate and account for each coponent separately as per IFRS 16.

The questions are:
Do I allocate a fraction of payment to the real lease and discount it for 30 years and allocate a fraction of the payment to the equipment and discount it for 7 years?
Does this imply I have to get 2 discount rates ( one for a 30 year period for real estate lease and other for 7 year period for equipemnt lease)?
Or should the payment be discounted for 30 years and one single interest rate to discount he payments?


Thank's in advance.
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Marek Muc
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Re: IFRS 16 -Lease components Separation

Post by Marek Muc »

I think it's more a question on application of the local law. If the equipment is a part of the building, is it really against the law to enter into a 30-year "combined" lease? And if so, does it mean that there is no liability beyond this 7-year period to the lessor with respect to the equipment? This would mean that the law overrides the contract.
E.Reis
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Re: IFRS 16 -Lease components Separation

Post by E.Reis »

I checked with a jurist and they can't be combined.
There must be 2 lease liabilities in the contract, one for equipment at a maximum of 7 years and another one for the building up to 30 years.

In this case ther must be 2 separate discount rates.
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Marek Muc
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Re: IFRS 16 -Lease components Separation

Post by Marek Muc »

Then yes - two separate discount rates are needed
E.Reis
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Re: IFRS 16 -Lease components Separation

Post by E.Reis »

Much appreciated!
:)
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