Question

For the following arrangements, discuss whether they are lease transactions, and thus fall under the ambit of AASB 16/IFRS 16.

1. Entity A enters into a contract with Entity B, whereby Entity B will provide 5 SUV

   vehicles for Entity A to use over the next 3 years. The vehicles have been selected by Entity A from a large pool of similar vehicles and are explicitly identified in the contract. Entity B is only allowed to substitute the vehicles if, and only for the period when, the vehicles are being repaired.

2. Entity C enters into a contract with Entity D, whereby Entity D will provide 2 aeroplanes for Entity C to use over the next 5 years. The aeroplanes have been selected by Entity C from a large pool of similar aircraft, but remain in the airport hangar owned by Entity D when not in use and can be substituted at any time by Entity D.

3. Entity E enters into a contract with Entity F, a shopping centre operator, whereby Entity E will be offered a space for a pop-up shop in one of the centres managed by Entity F. The contract specifies the size of the space to be provided, not the actual location.

Answer 1

First scenario: There is an identifiable asset,5 SUV vehicles specified in the contract.Entity A has a right to use the vehicles for the period of the contract.Entity B does not have the right to substitute any of the vehicles unless they are being serviced or repaired.Therefore Entity A would need to recognise a right-to-use of asset and a lease liability in the statement of financial position.

Second Scenario;This is not a lease.There is no identifiable asset.Entity D can exchange the 2 aeroplanes with some another.Therefore Entity C should account for rental payments as an expense in profit and loss.

Third scenario;This is not a lease.Pop up shop is a temporary use of physical space to create long term,lasting impression with potential customers .In this case there is no identifiable asset.in fact the location of the shop is also not specified in the contract.Hence Entity E should account for rental payments as an expense in profit and loss.