It is common for a contract to contain lease and non-lease components. Here we respond to the question we are hearing on what term to use by a lessor when allocating contract consideration to lease and non-lease components under AASB 16 Leases.
A property lease may also include cleaning services. A lessor allocates the consideration in the contract to the lease and non-lease components in accordance with AASB 15 Revenue from Contracts with Customers. If the contract provides the lessee with a renewal option for both the lease and non-lease components, the lessor may determine that the contract period under AASB 15 differs from the lease term under AASB 16.
Company G leases office space to Company H. Under the arrangement, G also provides cleaning services for the entire lease term. Contract term is five years with the lessee having an option to extend for another two years. Annual payments, including cleaning, are $160,000 for the initial five years. For the extension period, annual payments are reduced to $150,000:
The stand-alone selling price of the property lease without cleaning services is estimated at $120,000 p.a., and the stand-alone selling price for cleaning is $50,000 p.a.
At commencement date, G concludes that the lease term is seven years, on the basis that it is reasonably certain that H will exercise the extension option.
If the contract was wholly accounted for under AASB 15, the contract term would be five years, because this is the period for which the two parties are contractually committed.
Question: What is the term a lessor uses for allocating consideration in a contract with both a lease and non-lease component when it assesses it is reasonably certain that the lessee will exercise the option to extend?
Interpretive response: Company G should allocate the consideration to the lease component (property lease) and non-lease component (cleaning services) based on the lease term as determined under AASB 16 – i.e. seven years.
This means that G allocates the total consideration based on seven years ($1,100,000) to the property lease and cleaning services. The calculations are illustrated below.
|Stand-alone selling price||Allocation||Calculation|
|Property lease||$120,000 x 7 = $840,000||$776,000||(840,000/1,190,000) x $1,100,000|
|Cleaning services||$50,000 x 7 = $350,000||$324,000||(350,000/1,190,000) x $1,100,000|
In accordance with AASB 16 the total consideration allocated to the property lease is recognised on a straight line basis. Therefore G recognises $110,857 p.a. ($776,000/7) for seven years.
G separately applies the requirements of AASB 15 to the amount of total consideration allocated to the cleaning services – $324,000. In applying AASB 15 to the cleaning services, G needs to determine the amount of consideration relating to years one to five, and that relating to the option to renew for two years at a discount. This can be complex to apply.
At inception of a contract, an entity shall assess whether the contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration [AASB 16.9].
An entity shall determine the lease term as the non-cancellable period of a lease, together with … periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option… [AASB 16:18].
For a contract that contains a lease component and one or more additional lease or non-lease components, a lessor shall allocate the consideration in the contract applying paragraphs 73–90 of AASB 15 [AASB 16:17].
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