IFRS 16 - lease term

[Claire D.]

Hello,

just joined this forum and I hope you can shed some light on this question about contract duration / estimated useful life of an asset from an IFRS 16 perspective.
I couldn't find discussion on this topic hence I've created a new entry.
As per IFRS 16 the economics of the contract should be taken into account to determine the lease term.
Let's assume the company plans to use the asset for the next 25 years, has a contract for 15 years with a 10 year extension option but the operating permit granted by local authorities is valid for 20 years only and at this very moment there is no certainty it will be renewed.
Should I consider that the actual contract duration is 20 year io 25 ?

Thank you!

Claire

[Marek Muc]

Hi, as I understand, it's either 15 or 25 as the option is for 10 years after 15 years , right?

The lease contract is with the local authority which also gives permits to use the asset subject to the lease?

[Claire D.]

Hello Marek,

thanks for coming back so quickly.
The lease contract is with a private agent but to operate the asset the company - the lessee - needs a permit from local authorities.
If there is a disconnect between lease contract signed with the lessor (contract valid let's say until 2025) and operation permit granted by public authorities (authorisation granted until 2024) should I take into account the validity of the work permit as the end the lease ? Clearly it the permit to operate is not extended the company will no longer be allowed to use the asset.

I hope this is a bit clearer.

Thank you.

Regards from Prague,

Claire

[Marek Muc]

RoU and lease liability relate to lease contract. You will have to pay until 2025 irrespective of the permit right? If so, the lease liability is recognised for payments until 2025.

The risk relating to the permit may trigger an impairment of the RoU. If this period is covered by an extension option you take that risk into account when assessing whether you are reasonably certain to exercise that option

[Claire D.]

Thank you Marek.
So we need to make sure contract duration is not exceeding permit duration. The question about contract termination is more a legal issue. It's of course not ideal to keep paying the rent of an asset we are no longer authorized to use.