Ask the Expert: Non-lease components of leases

David Holland, Moore Stephens National Head of Technical Accounting, offers his advice on technical and compliance issues that impact businesses.
 
Issue
A lease of a motor vehicle is $1,000 per month, included in the cost is $100 per month related to future servicing and maintenance of the vehicle.
 
How is this treated under AASB 16?
 
Conclusion
There are two options:

1. Separate out the non-lease component (servicing and maintenance of $100 per month) and include the $900 per month in the calculation of the lease liability; or

2. Include $1,000 per month in the calculation of the lease liability (using the practical expedient in paragraph 15)
 
Background - AASB 16
Separating components of a contract
12 For a contract that is, or contains, a lease, an entity shall account for each lease component within the contract as a lease separately from non-lease components of the contract, unless the entity applies the practical expedient in paragraph 15. Paragraphs B32–B33 set out guidance on separating components of a contract.
 
Lessee
13 For a contract that contains a lease component and one or more additional lease or non-lease components, a lessee shall allocate the consideration in the contract to each lease component on the basis of the relative stand-alone price of the lease component and the aggregate stand-alone price of the non-lease components.

14 The relative stand-alone price of lease and non-lease components shall be determined on the basis of the price the lessor, or a similar supplier, would charge an entity for that component, or a similar component, separately. If an observable stand-alone price is not readily available, the lessee shall estimate the standalone price, maximising the use of observable information.

15 As a practical expedient, a lessee may elect, by class of underlying asset, not to separate non-lease components from lease components, and instead account for each lease component and any associated nonlease components as a single lease component. A lessee shall not apply this practical expedient to embedded derivatives that meet the criteria in paragraph 4.3.3 of AASB 9 Financial Instruments.

16 Unless the practical expedient in paragraph 15 is applied, a lessee shall account for non-lease components applying other applicable Standards.
 
Separating components of a contract (paragraphs 12–17)
B32 The right to use an underlying asset is a separate lease component if both:
  • the lessee can benefit from use of the underlying asset either on its own or together with other resources that are readily available to the lessee. Readily available resources are goods or services that are sold or leased separately (by the lessor or other suppliers) or resources that the lessee has already obtained (from the lessor or from other transactions or events); and
  • the underlying asset is neither highly dependent on, nor highly interrelated with, the other underlying assets in the contract. For example, the fact that a lessee could decide not to lease the underlying asset without significantly affecting its rights to use other underlying assets in the contract might indicate that the underlying asset is not highly dependent on, or highly interrelated with, those other underlying assets.
B33 A contract may include an amount payable by the lessee for activities and costs that do not transfer a good or service to the lessee. For example, a lessor may include in the total amount payable a charge for administrative tasks, or other costs it incurs associated with the lease, that do not transfer a good or service to the lessee. Such amounts payable do not give rise to a separate component of the contract, but are considered to be part of the total consideration that is allocated to the separately identified components of the contract.
 
Separating lease and non-lease components
BC135 The objective of the Leases project is to change the accounting for leases—not the accounting for services. The IASB, therefore, took the view that IFRS 16 should apply only to the lease components of any contract. The accounting for services (or the service components of a contract) should not be affected, regardless of whether the contract is only for services or includes the purchase, or lease, of an asset as well as services. Accordingly, IFRS 16 requires:
  • a lessor to separate lease components and non-lease components of a contract. On the basis of feedback received from lessors, the IASB concluded that a lessor should be able to separate payments made for lease and non-lease components. This is because the lessor would need to have information about the value of each component, or a reasonable estimate of it, when pricing the contract.
  • a lessee to separate lease components and non-lease components of a contract, unless it applies a practical expedient whereby it is not required to separate a lease component from any associated non-lease components and can instead elect to treat these as a single lease component. The IASB decided to permit this practical expedient for cost benefit reasons and in response to requests from preparers not to require separation in all scenarios. In the IASB’s view, the practical expedient will reduce cost and complexity for some lessees, while not creating significant issues of comparability. This is because, in general, a lessee is not expected to adopt the practical expedient for contracts with significant service components because that would significantly increase the lessee’s lease liabilities for those contracts. The IASB expects that lessees are likely to adopt this practical expedient only when the non-lease components of a contract are relatively small.
BC136 IFRS 16 requires a lessor to allocate the consideration in a contract to lease components and non-lease components applying the requirements in IFRS 15 on allocating the transaction price to performance obligations. This approach will ensure consistency for entities that are both a lessor and a seller of goods or services in the same contract. The IASB concluded that the approach applied by a lessor should not be different from the approach applied by a seller to allocate consideration in a revenue contract with more than one performance obligation.

BC137 If a lessee separates lease and non-lease components of a contract, IFRS 16 requires the lessee to allocate the consideration to those components on the basis of the relative stand-alone price of each lease component and the aggregate stand-alone price of the non-lease components. The IASB acknowledged that the stand-alone price of lease and non-lease components might not be readily available and, consequently, decided to permit the use of estimates, maximising the use of observable information. In the IASB’s view, the use of estimated stand-alone prices by a lessee, if observable prices are not readily available, addresses some of the most significant concerns raised by both lessors and lessees with respect to the separation of lease and non-lease components: lessors had expressed concerns about providing pricing information to lessees and lessees had expressed concerns that obtaining observable stand-alone pricing information that is not readily available could be onerous and costly. The IASB also observed that applying the previous requirements in IAS 17, a lessee had been required to allocate the consideration in a contract between lease and non-lease components using estimates of the relative fair value of those components. The IASB was not aware of any significant practical difficulties in applying those requirements.