Lease agreements frequently bundle multiple components – from complex outsourcing arrangements, to simple real estate leases in which the landlord provides building maintenance. If your business has leases, you will probably face component questions when implementing IFRS 16 Leases.
The lease component is the unit of account for lease accounting. Lessors and lessees need to identify, and generally separate, lease and non-lease components to apply the new standard. To do this, they need to allocate the consideration in the contract between the components that they account for separately.
For a lessor, this process is necessary to correctly distinguish lease income from other revenue. Lessors generally apply IFRS 15 Revenue from Contracts with Customers to do this.
For a lessee, this process has a more fundamental accounting impact – it determines what proportion of a contract will be recognised on-balance sheet. The new standard has specific guidance on how to determine this.
Our Lease components (PDF 1.3 MB) publication contains practical guidance and examples showing how to identify lease and non-lease components in a contract and how to allocate the consideration. We hope you will find it useful as you apply the new standard.
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