A logistics company enters into a contract to use a specific truck, identified by registration plate in the contract, for two years. The supplier has no right to substitute the truck for a different one, and throughout the period the logistics company decides how, when, and for what cargo the truck is used, while also obtaining substantially all of the truck's economic benefits. Under IFRS 16, how should the logistics company classify this contract?
- As a service contract, because the supplier retains legal title to the truck throughout the period
- As a lease only if the contract's title explicitly uses the word 'lease' or 'rental'
- As neither a lease nor a service contract, since IFRS 16 only applies to contracts for real estate and heavy equipment above a materiality threshold
- As a lease, because the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration — the truck is identified, substitution rights are absent, and the customer both directs its use and obtains substantially all of its economic benefits
Why D? And why not the others?
Correct answer: D. As a lease, because the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration — the truck is identified, substitution rights are absent, and the customer both directs its use and obtains substantially all of its economic benefits
IFRS 16 paragraphs 9-11 define a lease as a contract that conveys the right to control the use of an identified asset for a period of time in exchange for consideration, which requires an identified asset (here the specific truck, with no supplier substitution right) and control resting with the customer, evidenced by the customer directing how and for what purpose the asset is used and obtaining substantially all of the economic benefits from that use. All of these features are present, so the arrangement is a lease. The option focused on legal title is wrong because IFRS 16's test turns on control of use, not on who holds legal title — a lessor commonly retains title throughout a lease term. The option requiring the word 'lease' or 'rental' in the contract's title is wrong because IFRS 16 looks to the substance of the arrangement rather than its label. The option citing a real-estate-and-equipment-only scope with a materiality threshold is wrong because the core lease definition applies broadly to identified assets of any type; IFRS 16 does provide separate, narrower recognition exemptions for short-term leases and low-value assets, but those are optional practical expedients, not a blanket restriction on which asset types or contracts can meet the definition of a lease in the first place.
Source: IFRS 16 Leases, paragraphs 9-11 (definition of a lease)