Entities may enter into agreements for subsurface rights. Typically this involves obtaining the right to place items (such as pipelines or cables) in an underground space. Such arrangements are common in the telecommunication, power and utilities, oil and gas and mining sectors, as well as for companies with significant land ownership. Where these occur above ground they are often referred to as ‘way leaves’ or ‘easements’.
In June 2019, the IFRS Interpretations Committee (IFRS IC) issued an agenda decision regarding subsurface rights. The decision outlines that a specified underground space is physically distinct from the remainder of the land where such space is explicitly defined in the contract. Together with other facts contained in the scenario, the IFRS IC noted that the agreement contained a lease.
We consider the impact of AASB 16 Leases on the fact pattern considered by the IFRS IC, as well as other scenarios which are common in practice.
The IFRS IC considered the following facts:
Interpretive response: Yes, based on the scenario above, the IFRS IC considered the arrangement to be a lease because:
The IFRS IC decision considered a narrow fact pattern. In practice, there are many variations of the scenario above that could change the assessment, for example:
Interpretive response: There may be a difference in analysing the scenario above under US GAAP. There are presently mixed views on whether a lease exists. One view considers that the subsurface land is identifiable and can be leased, whilst the other equates the subsurface land to air-use rights. Air-use rights are explicitly identified under US GAAP as an intangible asset and are therefore out of scope of the leasing standard.
There may be significant judgement and effort involved in determining whether each component is separable, and if so, deriving standalone prices. As a practical expedient, companies may elect not to separate lease and non-lease components, however this would effectively capitalise services as right-of-use assets and lease liabilities.
A contract contains a lease if the contract conveys the right to use an identified asset for a period of time in exchange for consideration [AASB 16:9].
An identified asset can be explicitly specified in the contract or implicitly specified at the time the asset is made available for use. [AASB 16: B13].
A customer does not have the right to use an identified asset if the supplier has a substantive right to substitute the asset throughout the period of use. A right to substitute is considered substantive only if both of the following conditions are met:
To control the use of an identified asset, a customer must have the right to obtain substantially all of the economic benefits from the use of the asset through the period of use. An example is by having exclusive use of the asset throughout that period. [AASB 16: B21].
A customer has the right to direct the use of an identified asset in either of the following situations:
For contracts which contain a lease component and one or more additional lease or non-lease components, a lessee shall allocate the consideration to each component based on the relative standalone price for each lease component and aggregate standalone price for non-lease components. [AASB 16: 13].
A lessee may elect, by asset class, not to separate lease and non-lease components and instead account for each lease component and associated non-lease components as a single lease component. [AASB 16: 15].