IFRS 16 — Subsurface rights

Date recorded:


In March 2019 the Committee discussed 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.

In identifying whether the contract contains a lease, the staff analysed 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 to change the defined underground space.

The staff highlighted that the conclusion that it is an identified asset and meets the 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.

Comment letters were received and a majority agrees with the Committee's decision not to add this matter to its standard-setting agenda. However, one comment letter expresses the concern of whether the underground space is tangible or not and another raises that contracts of subsurface rights often include compensation to the supplier for elements other than subsurface rights and so suggests specifying in the agenda decision that IFRS Standards provide an adequate basis for an entity to determine whether the contract in the request contains a lease component.

Staff analysis

The staff consider existing IAS 38 and IAS 16 are clear in reaching the decision of whether the subsurface rights are tangible or not. The staff also consider not to make the suggestion of changing the conclusion in the tentative agenda decision in order to better address the question specified in the submission and avoid confusion of non-lease components, which is not discussed in the tentative agenda decision.

Staff recommendation

The staff recommended finalising the agenda decision with no changes.


All Committee members were supportive of the agenda decision. The Committee decided, by a majority of votes, to adopt the wording in the agenda decision.

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