IFRIC 4 Determining whether an Arrangement contains a Lease establishes criteria for determining whether a contract should be designated as a lease.
The following conditions must be met for an arrangement to qualify for designation as a lease:
fulfilment of the arrangement is dependent on the use of a specific asset; and
the arrangement conveys the right to use the asset.
17.1.1 Use of a specific asset
A specific asset is identified either explicitly or implicitly. A specific asset is implicitly identified when:
it is not economically feasible or practical for the supplier to use alternative assets;
the supplier only owns one suitable asset for the performance of the obligation;
the asset used needs to be at a particular location or is specialised; or
the supplier is a special purpose entity formed for a limited purpose.
An arrangement that involves the use of assets located at a mine site, where the geographical isolation precludes any practical form of substitution of the assets, would normally meet this test.
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17.1.2 Right to use the specific asset The payment provision under an arrangement is analysed to determine whether payments are made for the right to use the asset, rather than for the actual use of the asset or its output. This requires a consideration of whether any of the following conditions are met:
the purchaser has the ability (or right) to operate or direct others to operate the asset in a manner it determines while obtaining (or controlling) more than an insignificant amount of the output of the asset;
the purchaser has the ability (or right) to control physical access to the asset while obtaining (or controlling) more than an insignificant amount of the output of the asset; and
the purchase price is not a fixed/market price per unit of output, and it is remote that any third party will take more than an insignificant amount of the output of the asset.
Arrangements in which a mining entity takes substantially all of the output from a dedicated asset (such as an oxygen plant) will often meet one of the above conditions. This occurs regularly in the mining industry because of the remote location in which mines are often found.
For example, suppose a mining entity commits to pay a power station a fixed amount per annum, regardless of the amount of electricity generated.
Where it is remote that a third party will take more than an insignificant amount of the electricity generated (for example, where the power station is located at a remote mine site and is not connected to the local electricity grid), the payments are made for the right to use the power station. Hence, the arrangement is classified as a lease.
7.2 What are the consequences of an arrangement that contains a right to use an asset?
When an arrangement is within the scope of IFRIC 4, cash flows under the arrangement must be separated into their respective components.
The components frequently include the right to use the asset, service agreements, maintenance agreements, and fuel supply. The payments for the right to use the asset are accounted for as a lease in accordance with the guidance in IAS 7.
This includes the classification of the right of use as either an operating lease or a finance lease.
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The accounting for the other components is in accordance with the relevant guidance in IFRS.
17.2.1 Operating lease
If an arrangement contains an operating lease, the specific asset leased remains on the balance sheet of the lessor. However, operating lease payments are recognised on a straight-line basis over the life of the lease.
17.2.2 Finance lease
If an arrangement contains a finance lease, the specific asset leased is recorded on the balance sheet of the lessee and not the lessor. The lessor recognises a lease receivable, which falls within the scope of IAS 9.
17.3 Presentation and disclosure
IAS 7 sets out detailed disclosure requirements for leases. The more common disclosures required are set out below:
a general description of an entity’s significant lease arrangements;
the total of future minimum lease payments (and the present value of future minimum lease payments and a reconciliation for finance leases) for each of the following periods:
no later than one year;
later than one year and not later than five years; and
later than five years; and
the carrying amount of assets held under finance leases.
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7 Le as in g
8 N o n- G A A P m ea su re s
Investors and analysts always desire more information about mining entities. Whilst IFRS sets out the form and content of a mining entity’s financial statements, management may wish to present investors with supplemental information in the form of non-GAAP measures. Most commonly, these comprise earnings before interest and tax (EBIT), earnings before interest, tax, depreciation and amortisation (EBITDA) and various forms of adjusted profit or underlying profit based on management’s view of meaningful information for investors. Another common non-GAAP measure in the mining industry is cash costs; for example, gold mining entities often present the cash cost per ounce of gold produced.