The IFRS Interpretations Committee has issued its final agenda decision on how the lead operator in a joint operation accounts for lease arrangements. KPMG’s Insights includes updated guidance on accounting for leases in joint arrangements.
In March 2019, the IFRS Interpretations Committee (IFRS IC) issued its final agenda decision on how the lead operator in a joint operation accounts for lease arrangements. The question has been raised by a number of entities as part of their implementation of IFRS 16 Leases.
The decision outlines situations where the joint operation is not structured through a separate vehicle and the lead operator, as a sole signatory, enters into a lease contract with a third party for an item of property, plant and equipment that will be operated jointly as part of the joint operation’s activities.
The IFRS IC noted that IFRS 11 Joint Arrangements requires the liabilities that a joint operator recognises to include those for which it has primary responsibility. That is, where the lead operator is a sole signatory it would account for the full lease liability on its balance sheet.
In addition, the lead operator would initially account for the entire right-to-use asset. The lead operator would then need to assess contractual arrangements with the other joint operation investors to determine whether a sub-lease is present.
KPMG has updated its guidance on this issue in Insights. Refer to Appendix 1 for three practical examples contained in our guidance.
The IFRS IC agenda decisions is reproduced in Appendix 2 of the attached PDF file.
Both appendices are included in the PDF version.
IFRS 16 defines a leases as a contract, or part of a contract, that conveys the right to control the use of an identified asset (the underlying asset) for a period of time in exchange for consideration. If a contract contains a lease, then it will generally be on-balance sheet for the lessee.
To determine whether a contract conveys the right to control the use of an identified asset for a period of time, an entity assesses whether, throughout the period of use, the customer has a right to:
If the customer in the contract is a joint arrangement, then an entity considers whether the joint arrangement has the right to control the use of an identified asset throughout the period of use.
Yes. A joint arrangement – i.e. a joint venture or joint operation – may be a lessee in a lease, provided that the parties to the joint arrangement collectively have the right to control the use of an identified asset throughout its period of use. In many cases, this control is exercised through the joint control of the arrangement.
It would be inappropriate to conclude that a contract does not contain a lease if each of the parties to the joint arrangement:
For a joint arrangement to be a lessee, it must first be identified as the customer in the lease contract with the asset supplier. This means that the contract with the asset supplier is:
When the joint arrangement is considered to be the customer in a lease, the accounting for the lease is as follows:
Therefore identifying the customer is critical to determining the accounting for each of the investors in a joint arrangement.
The key consideration for determining if a sub-lease is present is the assessment of who controls the use of the underlying asset:
Refer to Appendix 1 (included in PDF version) for and extract from KPMG’s Insights in relation to the above.