IFRS 16 — Definition of a Lease - Shipping Contract

Date recorded:

Agenda Paper 2


In its September 2019 meeting, the Committee discussed a submission about whether IFRS 16 applies to a particular shipping contract. In the fact pattern, 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, the ship, throughout the period of use. In general, Committee members agreed with the conclusion that the contract contains a lease but suggested changing the agenda decision to make it more useful and ed­u­ca­tional to help con­stituents un­der­stand the step approach in IFRS 16.

Comments were received and most of the respondents agreed not to add this matter to the Committee’s standard-setting agenda, but instead to publish an agenda decision. Some respondents suggest improvements to the wording of the agenda decision. Petróleo Brasileiro (Petrobras) disagreed with the Committee's technical conclusion.

Staff analysis

One respondent considered that the tentative agenda decision should make it clear that the customer is required to first assess whether those decision-making rights retained by the customer are relevant. Only if the customer's decision-making rights are assessed to be relevant would the entity come to the conclusion that the contract contains a lease. The staff agree with this suggestion and recommend a change to the agenda decision in this respect by adding the words "the customer has determined that those remaining decision-making rights are relevant..."

Some respondents suggested the agenda decision include an additional clarification of how the customer determines which decision-making rights are relevant, while some considered the proposed wording to be overly specific. The staff continues to support the approach of not addressing very specific decision-making rights described in the submission because it considered that this approach is more helpful to stakeholders in understanding how to apply the requirements in IFRS 16 generally. On the other hand, the staff recommend highlighting the requirements in B25 of IFRS 16 by adding "The customer has the right to make decisions about the use of the ship that affect the economic benefits." to the Committee's analysis.

Petrobras disagreed with the Committee's technical conclusion because it considered it unnecessary to have a conclusion from the Committee. This is because the assessment of whether the customer's decision-making rights are relevant is a judgement. However, the staff note that IFRS 16 requires only that those decision-making rights affect the economic benefits that are derived from use. This means that there is no threshold in making such determination and therefore the staff would expect relatively little judgement in determining the relevance. Petrobras has also commented that the fact pattern in the agenda decision is not sufficient to draw a conclusion and one could assert that all relevant decisions are predetermined. The staff disagree with this because the fact pattern states that those decision-making rights retained by the customer are relevant and the customer has such rights throughout the period of use. Therefore, when applying IFRS 16:B25, the customer’s decision making rights are relevant and it is the customer instead of the supplier who has such ‘how and for what purpose’ decision-making rights.

One respondent requested standard-setting in relation to the decisions determined before the period of use. The staff considered that IFRS 16:B29 is already clear in explaining that if the customer's rights related only to specifying the output of an asset before the period of use, the contract would not contain a lease.

Staff recommendation

The staff recommended finalising the agenda decision subject to some wording changes.


In general, the Committee members agreed to finalise the agenda decision. One Committee member suggested restructuring the agenda decision so that the sentence "Decision-making rights are relevant when they affect the economic benefits to be derived from use." could better elaborate what kind of decision-making rights are most relevant as stated in the previous sentence. Some Committee members considered that the key assumption that draws the conclusion that the contract constitutes a lease is that the customer has already exercised its judgement and determined that the decision-making rights are relevant. It should be stated clearly in the agenda decision that this judgement should be made on a case-by-case basis and different fact patterns in practice may result in a different conclusion. One Committee member did not agree with the conclusion even though he agreed with the staff analysis because he held the view (as stated in the September 2019 meeting) that the economic impact of the de­ci­sion-mak­ing right to determine the order of voyages is very small and this is resulting in the recog­ni­tion of a large lease asset and liability on the entity's balance sheet. This was despite the fact that the customer has already made the determination that the decision-making rights are relevant in accordance with IFRS 16:B25.

The Committee decided, by a majority vote of 11, to finalise the agenda decision with two amendments as discussed above.

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