Let’s pose a scenario that Company Y enters into a lease of an office building for 5 years. It pays a fixed amount of $20,000 per month for the right to use the building. The amount also includes maintenance and waste disposal services, water usage, and a reimbursement for insurance premiums and property taxes paid by the landlord*. Company Y chooses to capitalise only payments for the right to use the building**.

Question 1: Should the Company include the entire fixed amount as the lease payments?

Interpretive response: No, Company Y allocates the fixed amount to the different types of benefits it receives from the landlord.

The Company has a lease, that is, it receives a right to use the building (lease component). It also receives:

• maintenance and waste disposal services (non-lease component); and
• a service for water usage (non-lease component).

The Company does not receive a benefit from the insurance premiums and property taxes. Accordingly, Company Y should split the monthly payments between lease payments (to be included in the lease liability) and an expense for the non-lease component services received.

Question 2: How are lease payments to be included in the lease liability determined?

Interpretive response: Company Y allocates the total payments of $20,000 per month between the benefits it receives (lease and non-lease components) from the landlord.

The allocation between the lease and services is based on their respective standalone selling prices as illustrated below:

Component	Stand-alone prices	Selling price ratio	Allocation of consideration
Building lease	$22,000	88 percent	$17,600¹
Maintenance, waste disposal and water***	$3,000	12 percent	$2,400²
Total	$25,000		$20,000

¹ ($25,000 x 88 percent)
² ($25,000 x 12 percent)

The Company includes $17,600 in its lease liability, and $2,400 is recognised as an operating expense in the month that it is incurred.

* This is based on the assumption that the property owner is obligated to pay the property taxes. If the occupier (lessee) has the statutory obligation to pay the property tax, then that tax is accounted for under Interpretation 21 Levies.

** When an arrangement contains lease and service components, a lessee has a choice to either:

• Combine the lease and service components and account for them together as a lease; or
• Separately account for the lease and service components.

This choice is made by class of underlying asset.

*** Allocation of the consideration in the contract is on the basis of the relative stand-alone price of the lease component and the aggregate stand-alone price of the non-lease components.

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