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Overview: This Newsletter discusses the IFRIC decision on IFRS 16 lease term.
In December 2019, the IFRS Interpretations Committee (IFRIC) concluded that the enforceable period of a lease under IFRS 16 Leases reflects broader economics, not just legal rights and cash termination payments. Lessees consider the enforceable period when they are determining the lease term, and therefore which payments to include in the lease liability. Lessees that had previously interpreted the enforceable period more narrowly will need to consider the impact, which may increase recognised lease liabilities.
When might this be an issue?
The IFRIC guidance is applicable in assessing lease term for renewal periods. Some possible scenarios include:
  1. Month to month leases for office space where the lease has installed non-movable leasehold improvements expected to be used for several years.
  2. Renewal periods for equipment that is integral operating equipment for the lessee and could not be moved or relocated without insignificant cost or disruption of operations. For example: (i) equipment leased at a remote mine site or (ii) equipment integrated into a manufacturing or production facility.
Applying the recently issued IFRIC guidance could result in the lease term being longer than companies had previously assessed particularly for companies that had focused solely on cash termination payments.
Entities that change their approach to assessing lease terms in light of the IFRIC agenda decision may need some time to determine and implement any changes, which would then be implemented retrospectively.
Further details can be found here:
  1. November 2019 IFRIC Update
    (https://www.ifrs.org/news-and-events/updates/ifric-updates/november-2019/),
  2. PwC In brief, and the
    IFRS IC decision on IFRS 16 lease term - PwC In brief (pdf 115kb)
  3. December 2019 Canadian IFRS Discussion Group Meeting summary
    (https://www.frascanada.ca/en/acsb/committees/ifrsdg).
Questions on this IFRIC can be directed to anyone in ACS.
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