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IAS 16, IAS 38 and IAS 17 — Purchase of right to use land

Date recorded:

During the March 2012 meeting, the Committee discussed a request from a specific jurisdiction for clarification on the purchase of a right to use land and whether it should be accounted for as a purchase of property, plant and equipment, a purchase of an intangible asset or a lease of land. In this jurisdiction, entities are not allowed to own freehold title to land but instead purchase the right to exploit or build on the land.

The Committee identified characteristics of a lease in the fact pattern submitted and observed a right to use land is generally accounted for under IAS 17. However, the Committee noted the current Leases project is silent on whether a right of use asset is a tangible or intangible asset and that based on the tentative decisions to date in that project, long term leases of land would not be excluded from the scope of that project.

In March 2012, the Committee asked the staff to prepare a tentative agenda decision. The agenda decision noted that the Committee identified characteristics of a lease in the fact pattern and that a lease could be indefinite with extensions or renewals and therefore the existence of an indefinite period does not itself prevent the right to use from being accounted for as a lease in accordance with IAS 17. But because the fact pattern is specific to a certain jurisdiction, the Committee decided not to take the issue on to its agenda.

All Committee members agreed to the draft agenda decision not to take the issue onto the Committee’s agenda.

Four comment letters were received with respect to the tentative agenda decision in the March 2012 Committee meeting. Two of the letters supported the Committee’s decision not to add this issue to its agenda; agreeing with the analysis in the tentative agenda decision. One comment letter generally agreed with the tentative agenda decision but was of the view that the Committee should give their specific view on the issue due to the circumstances being quite specific to a particular jurisdiction. The submitter provided further clarity over the specific facts and argued that after clarity of two specific points that the purchase of a right to use the land under outright sale transactions should not be accounted for as a lease.

The staff analysed the additional clarification points addressed by the submitter. These were:

  1. The government determines the legal relationship between the land and the right holder, where the government acts as the administrator and the regulator for the State.
  2. The land reverts to the State if an entity decides not to extend or renew the right to use the land. Another individual or entity pays only administrative fees and related taxes to the government to obtain the right to use the land.

The staff, having considered these two additional clarification points, still viewed this as exhibiting characteristics of a lease and that the tentative conclusion reached was not affected. The staff recommended that the Committee should reaffirm its decision not to take this issue onto its agenda and should not change the wording of the tentative agenda decision agreed at the May meeting.

One of the Committee members stated that the tentative agenda decision implies that you can have a finance lease with an indefinite term that is not depreciated and questioned the importance of the qualification of a finance lease vs. Property, Plant and Equipment under IAS 16 Property, Plant and Equipment as a non-depreciable asset. The staff clarified that if you conclude that the characteristics of a lease are present then you are required to make the judgement as to whether or not there is an asset with an indefinite useful life.

Another Committee member highlighted that the tentative agenda decision did not address the issue as to whether the lessee has the right to renew or whether the renewal is probable at the option of the lessor. If the lessee has no renewal option then one would have to question whether the asset can be identified as having an indefinite useful life. One other Committee member expanded on this area and stated that concluding whether this was land or an indefinite life lease would depend upon whether the government’s rights are non-substantive. It was stated that the tentative agenda decision could be framed around this notion and that in order for the conclusion to be land one would have to assume that the government’s rights are non-substantive. The member stated that the accounting maybe does not depend upon whether this is land or a lease but whether the government’s rights were substantive or not. The substance of these rights reach a similar conclusion to the renewals idea introduced above.

A further Committee member was concerned that the Committee seemed to be revisiting the technical conclusions that had already been reached. This was supported by the Chair. The member stated that the conclusions were based upon specific criteria and feedback has been supportive. The member stated that the tentative agenda decision should be amended to emphasise that this is an issue that is subject to judgement. One member identified that the “characteristics of a lease” noted in the tentative agenda decision should be explained.

The Chair noted that during the March 2012 meeting, the majority of the Committee concluded this was a lease. With a change in the facts, the Chair asked whether any Committee members would change their previous view. No Committee members would change their view. The large majority are still of the view that this has the characteristics of a lease and the majority were in agreement that the tentative agenda decision should remain with no changes for renewal rights and any of the objections noted above.

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