IFRS16 open-ended contracts reassessment

[noobIFRSnoob]

Hi,

I have a question regarding the standard practice or how should you approach according to the standard with open-ended contracts, that have no set ending date or even if they do, they renew automatically for whatever amount of years if nobody decides to cancel. Also lets say they do not have any penalty if you should cancel them.
How often should you reassess contracts like this? And also if the contract is for some kind of an asset, for example a land that could be used forever or basically if it does not expire. Is there like any common practice what should be the length for the expected ending date? And how often should you recalculate the lease.
To me it seems if you reassess very often and prolong the lease, you would end up recording more cost than necessary, because every time you reassess you will end up with 'paying' more interest and would never get to the lower interest cost at the end of the contract. This does not really reflect the objective truth regarding real transactions and would end up overstating the costs in a long period of time.

Maybe someone more experienced in IFRS16 standard can help me with this question and please share your knowledge regarding evergreen or open-ended contracts, lie how often do you reassess and calculate these.


Thanks in advance!

[sowmiyanagarajan]

From what I understand that there are no specific details regarding period of lease and the contact is open for cancellation any time and there are no penalty involved for cancellation. IFRS 16 explains lease term as below and in this case non-cancellable period is Zero and hence lease payments can be accounted as expense considering short term lease exemption.

Lease term

The non-cancellable period for which a lessee has the right to use an underlying asset, plus:

a) periods covered by an extension option if exercise of that option by the lessee is reasonably certain; and

b) periods covered by a termination option if the lessee is reasonably certain not to exercise that option

I may be wrong. Happy to hear other views. Thanks.

[JRSB]

is your lease in fact for land, as you say in your example?
If so, presumably you are doing nothing with it, since the lessor can cancel the lease with no notice.
There must be other factors to the scenario, what are the wider economics of the arrangement.

[noobIFRSnoob]

Okay, that is a really interesting take. Really happy to hear you sharing your opinion. I would say if there is anyone else willing and interested in commenting on this topic, I would really appreciate if you can go more in detail, like if there is any other exemptions.
For me personally, I have lately come across contracts which are as described above, that really are open-ended and there is no penalty involved or anything else. And the other types I have met lately, are for example that they are for 5 years and would renew for another 3 years if no party steps in that they would like to cancel it. But at the same time they do not contain any significant penalty and just contain some kind of paragraph that they would need 1 month notice for cancelation. I do not know if it makes any difference between these two types. And how should the expected ending date be defined, if there is really no real idea when the contract would be canceled. Basically they would be maintained forever or as long as possible and as long as the business is ongoing.

[noobIFRSnoob]

@JRSB

I do not really want to go into detail what business I work exactly for, just in case. But it is almost so as you describe, the contracts do not contain any penalties. And it is mutually beneficial to maintain these contracts. Although it takes some time to dismantle everything and set it up elsewhere, but the contracts themselves do not contain any penalties and they are set up as with renewal period or are entirely open ended and do not have a set date for ending to them

[Anjeet]

Hi Please refer knowledge base, may be helpful https://ifrscommunity.com/knowledge-bas ... IFRS%2016)

[Marek Muc]

Here are the practical approaches: https://ifrscommunity.com/knowledge-bas ... lease-term