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IFRS 16 Leases—Definition of a lease—Shipping contract (Agenda Paper 3)

Date recorded:


The Committee received a submission about whether a particular shipping contract contains a lease applying IFRS 16. The customer enters into a contract with a ship owner (supplier) for the exclusive use of a ship (specified in the contract) for a five-year period to transport coal to region 'S'. Some of the relevant decisions about how and for what purpose the ship is used are predetermined in the contract, for example, the capacity of the ship per voyage, consecutive voyage condition, types of voyages (only from three specified locations to region 'S'), shipment distance and duration per type of voyage and price per ton of coal transported per type of voyage. However, the customer has the right to determine the order of voyages throughout the period of use (i.e. from where the ship sails for each voyage) based on its annual and quarterly shipment plans. The customer does not have the right to operate or maintain the ship and did not design the ship.

The submitter asked whether the contract gives the customer the right to direct the use of an identified asset (ship) throughout the period of use.

Staff analysis

The staff address the question by analysing IFRS 16:B24 to IFRS 16:B30, as well as the flowchart set out in IFRS 16:B31. The term 'right to direct the use of an asset' is read as 'the right to direct how and for what purpose the asset is used'. An important element of the 'right to direct how and for what purpose the asset is used' are the decision-making rights that are most relevant to changing how and for what purpose the asset is used throughout the period of use. It is assessed whether those decision-making rights affect the economic benefits to be derived from using the ship (including the type of output and when, where, whether and how much output is produced). The customer’s right to determine the order (starting point) of voyages is a right to change where the output of the asset is produced. Therefore, the staff consider that the customer makes the relevant decisions about how and for what purpose the ship is used and has the right to change those decisions throughout the period of use. Consequently, the contract constitutes a lease.

Staff recommendation

The staff do not recommend adding the matter to the Committee's standard-setting agenda but to instead publish a tentative agenda decision that explains, more generally, how an entity applies the requirements in IFRS 16 on the right to direct how and for what purpose an asset is used.


In general, Committee members agreed with the staff analysis and conclusion. Some Committee members raised comments on the analysis of the economic impact and relevance of the decision-making right. A Committee member expressed his view that the economic impact of the decision-making right to determine the order of voyages is very small. Nonetheless, this results in the recognition of a large lease asset and a large lease liability on the entity's balance sheet. This might not be reflective of the economic substance of the transaction. The staff acknowledged that the analysis focuses on the relevant decision-making rights.

One Committee member was concerned with the analysis that "if the customer retains any such decision-making rights (with all others being predetermined), then the customer has the right to direct the use of the asset." The Chair responded that the conclusion in the agenda decision would be changed to be more affirmative. The revised conclusion would state that the assessment of the right to direct how and for what purpose the asset is used should be based on the assessment of the economic benefits derived from the use of asset (not only whether the customer retains the decision-making rights).

On the other hand, a Committee member was concerned about the lack of certain facts in the fact pattern described. In assessing the economic benefits arising from the asset, the entity shall also consider which party has to bear the loss if the ship is idle, which party has to bear the loss if an asset is destroyed because of an earthquake, or other events which are outside the control of either the supplier or customer. The fact pattern in the submission is not sufficiently detailed and additional facts are required to arrive at the conclusion.

One Committee member was concerned that the tentative agenda decision is too focused on the specific fact pattern which misleads users. He said that the analysis should leave more room for judgement.

With regards to the structure of the agenda decision, there were diverse views from different Committee members. Some preferred specifically answering the questions by reproducing the staff paper conclusion in the agenda decision while some preferred making the agenda decision broader and more open to allow room for judgement. They considered it is difficult or risky to get to a conclusion based on this fact pattern. A Committee member suggested that a generic description of IFRS 16 requirements and the application of judgement could be added after specifically answering the question set out in the fact pattern. This would enhance the completeness of the agenda decision. The Chair was inclined to this approach.

Consequently, the Chair suggested changing the agenda decision to make it more useful and educational to help constituents understand the step approach in IFRS 16. Applying that approach, an entity shall firstly make an assessment of whether the decisions are pre-determined, then identify what decisions are relevant decisions, and then assess the economic benefits of those decisions.

The Committee decided, by a majority of votes, not to add the matter to its standard-setting agenda and to instead publish a tentative agenda decision. The staff will make amendments to the proposed tentative agenda decision based on Committee member comments made in the meeting.


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