Determining Whether an Arrangement Contains a Lease

IFRIC 4

Determining Whether an Arrangement Contains a Lease

IFRIC 4

The Issue
  • Sometimes a company enters into an arrangement that does not taken the legal form of a lease but in substance the company has a right to use an asset in return for a payment
Determining whether an arrangement contains a lease
  • An arrangement contains a lease when the following two are met:
  1. fulfilment of the arrangement is dependent on the use of a specific asset
    • in fulfilling the arrangement, the supplier, must the asset explicitly identified in the arrangement;
    • if the supplier has the right and ability to fulfill the arrangement using other assets, the arrangement does not contain a lease
    • if not explicitly identified, it should be implicitly specified, for example the supplier only owns one asset that can be used to fulfill the arrangement
  2. the arrangement conveys a right to use the asset
    • an arrangement conveys a right to use the asset, when one of the following is met:
      1. The purchaser has the ability or right to operate the asset or direct others to operate the asset in a manner it determines while obtaining or controlling more than an insignificant amount of the output or other utility of the asset
      2. The purchaser has the ability or right to control physical access to the underlying asset while obtaining or controlling more than an insignificant amount of the output or other utility of the asset
      3. it is remote that parties other than the purchaser will take more than an insignificant amount of the output that will be produced or generated by the asset, and the price that the purchaser pays for output is not contractually fixed per unit of output nor equal to the market price per unit of output
        • this implies that the purchaser is paying an amount to use the asset (in addition to the output)

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