SOCPA Comments on Tentative Agenda Decision, Definition of a Lease—Substitution Rights IFRS 16
The International Financial Reporting Standard (IFRS) Interpretations Committee has published a preliminary decision on the definition of a lease when a lessor has the right to replace the leased asset during the lease term, and sought public opinion on this decision. In that preliminary decision, the Committee considered that the definition of a lease contract is achieved when the lessor would not benefit economically from the exercise of its right to substitute the asset throughout the period of use. The committee's decision came despite the fact that, according to the facts of the inquiry, the lessor's failure to benefit economically from the substitute was for part of the lease term and not for the entire term of the contract.
Saudi Organization for Chartered and Professional Accountants (SOCPA), in its comment on that preliminary decision, considered that the inquiry reveals a problem in applying the requirements of IFRS 16. This is because the standard did not specify whether the economic benefit to the lessor of having the right to substitute the asset for all or part of the contract period. In addition, it did not clarify whether it is necessary to divide the contract term so that the definition of the lease contract is fulfilled in the period during which the lessor does not benefit from the right to substitute. Further, it would not be fulfilled in the period during which the lessor benefits from the right to substitute in accordance with the Paragraph (B14) of the standard.
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