Our ‘Insights into MFRS 16’ series summaries key areas of the Standard and aims to demystify those key requirements that are challenging to apply in practice. This article considers the definition of a lease when applying MFRS 16.
Since accounting for leases under MFRS 16 results in substantially all leases being recognised on a lessee’s statement of financial position, the evaluation of whether a contract is (or contains) a lease is critical. And this evaluation must be made at the inception of a contract. In practice, a key area of judgement relates to contracts that are not in the legal form of a lease but involve the use of a specific asset and therefore might contain a lease – such as outsourcing, contract manufacturing, transportation and power supply agreements. Such contracts are often structured to provide a product or a service and include various components, amongst which include the use of a specific asset that might need to be separated from the other components. MFRS 16 contains guidance to help reporting entities make this assessment.
Definition of lease
How we can help
We hope you find the information in this article helpful in giving you some insight into aspects of MFRS 16. If you would like to discuss any of the points raised, please speak to your usual Grant Thornton contact.
