IFRS 16 — Subsurface rights

Date recorded:

Subsurface rights (Agenda Paper 5)


The Committee received a submission about the accounting for a particular contract for subsurface rights. In the contract described in the request, a pipeline operator (customer) obtains the right to place an oil pipeline in an underground space for 20 years in exchange for a consideration. The contract specifies the exact location and dimensions (path, width and depth) of the underground space within which the pipeline will be placed. The land owner retains the right to use the surface area of the land above the pipeline, but the right to assess and use the specified underground space rests with the entity.

Staff analysis

In identifying whether the contract contains a lease, the staff analyse the matter by using the guidance set out in IFRS 16:B31 and concluded that the contract contains a lease because:

  • the entity has an identified asset since the underground space is physically distinct from the remainder of the farmer's land, and the exact location and dimension of the pipeline are specified in the contract. The farmer does not have a substantive substitution right due to practical impracticability.
  • the customer (i.e. the entity) has the right to obtain substantially all of the economic benefits from the use of the asset throughout the period of use, and the customer has the right to direct how and for which purpose the asset is used throughout the period of use. This is on the basis that the 20-year period is exclusive for the entity and the farmer has no right to access to use or change the defined underground space.

The staff highlighted that the conclusion that it is an identified asset and meets definition of a lease is reached considering the particular facts and circumstances of the contract described in the submission and a different accounting response would result under different terms.

Staff recommendation

The staff recommend that the Committee does not add the matter to its standard-setting agenda but publish an agenda decision.


In general, the Committee members agreed with the staff analysis. However, there were discussions about whether the scope of the question should be extended to "above surface rights" that may include advertising space on a wall of the building. The Chair decided to stick to the fact pattern as opined by some Committee members as there are many examples which would lead to a long discussion and "above surface rights" are an entirely different issue.

One Committee member was concerned about maintaining convergence with US GAAP. The staff responded that this issue is about the identification of lease on which IFRS and US GAAP are fully converged. Therefore, the draft paper will be sent to the FASB staff for their comment before finalisation.

The Committee decided, by a majority of votes, not to add this matter to the Committee’s standard-setting agenda and publish a tentative Agenda Decision.

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