Chapter 4: Separation of lease and non-lease component

- Account for each lease component as a lease separately from non-lease components of the
contract
- Criteria:
1. Benefit own its own or together with other assets
2. Or highly interrelated/interdependent

- An entity applies the practical expedient – combine both

Example
A contract for a car may combine a lease with maintenance services. Other
contracts contain two or more lease components. For example, a single contract
may include leases of land, buildings and equipment.

Question 14:

- Lessor leases a bulldozer, a truck and a long-reach excavator to Lessee to be used in

Lessee's mining operations for four years.

- Lessor also agrees to maintain each item of equipment throughout the lease term.

- The total consideration in the contract is Tk600,000, payable in annual instalments of

Tk150,000, and a variable amount that depends on the hours of work performed in
maintaining the long-reach excavator.

- The variable payment is capped at 2 per cent of the replacement cost of the long-reach
excavator. The consideration includes the cost of maintenance services for each item of
equipment.
Does the Lessee controls/benefits from the use of the assets? How many lease and non-lease
components are there in the above example?

Answer 14:
Lessee accounts for the non-lease components (maintenance services) separately from each lease
of equipment applying [IFRS 16:12 guideline on separating component.
Lessee does not elect the practical expedient.
Lessee concludes that the lease of the bulldozer, the lease of the truck and the lease of the long-
reach excavator are each separate lease components. This is because:
a. Lessee can benefit from use of each of the three items of equipment on its own or
together with other readily available resources (for example, Lessee could readily lease
or purchase an alternative truck or excavator to use in its operations); and

b. although Lessee is leasing all three items of equipment for one purpose (ie to engage in
mining operations), the machines are neither highly dependent on, nor highly
interrelated with, each other. Lessee's ability to derive benefit from the lease of each
item of equipment is not significantly affected by its decision to lease, or not lease, the
other equipment from Lessor.

Consequently, Lessee concludes that there are three lease components and three non-lease
components (maintenance services) in the contract.

Question 15:

Entity A leases computer software and computer equipment from Entity B. Entity A’s own
engineers will customise the computer software to meet the specific needs of Entity A. While the
software and equipment are subject to a single contract, they could have been sourced separately
from different providers.
Entity A has concluded that the contract meets the definition of a lease. As permitted by IFRS
16:4, it accounts for leases of software licenses under IAS 38 instead of IFRS 16.
Please share your view on the above case? Whether the machine and the software should be
identified as separate lease components?

Answer 15:
Physical asset has significant value. Not merely a host for the software. Applies IFRS 16:B32.
Could have readily obtained either component separately
Software and the equipment are not highly dependent, nor highly interrelated,
Entity A concludes that they constitute two separate lease components. The lease of the computer
software component would be accounted for under IAS 38 under Entity A’s accounting policy and
the lease of the computer equipment would be accounted for under IFRS 16.