IFRS 16, what is a lease? According to the standard, the definition is ‘An agreement, or part of an agreement, which will transfer the right of use for an asset (the underlying asset) for a certain period of time in exchange for compensation’. Any questions are crucial to answering whether or not an asset constitutes a lease. All issues should be met. In order for the agreement to be considered a lease.
The first question for IFRS 16. What is a lease relates to whether the agreement relates to an identified asset or not. Access may be explicitly expressed in the agreement. E.g. by referring to a particular premises, a car with a registration number or computer with an identification number. However, the asset may also be implicitly expressed by the supplier not having the practical opportunity to replace the asset during the tenure period. The latter applies, for example. usually copy machines. Even if the supplier has a right to replace one copy machine with the customer for another, it would likely cost the supplier more to carry out the exchange than one could earn from switching. In any case, the copy machine is an identified asset.
The second question for IFRS 16. What is a lease is about whether the lease receives essentially all the financial benefits from access. A leaseholder who has an agreement for an asset used by several parties can rarely be considered to receive substantially all economic benefits. If the agreement does not relate to physically segregated parts of a greater asset. For example, it may refer to a fibre cable used to transmit data. If only one party has the right to use the fibre cable, this may lead to the conclusion that the agreement constitutes a lease. However, if the leaseholder is not entitled to essentially all economic benefits, the agreement does not constitute a lease.
Finally, what is the definition of a lease? The third question concerns whether the leaseholder determines the use of the asset. What is crucial is who controls how and the purpose of the asset is used. This is the case, for example. usually not who practically handles an asset. A machine that requires a special driver’s license to get performed does not necessarily have to be excluded from being a lease. Although the supplier provides the customer with such drivers. The crucial thing is who decides what is performed with the machine and when. I.e. who controls how and the purpose of the machine is used.