Financial Reporting · Leasing

IFRS 16 Scope and Lease Identification for ACCA Financial Reporting

Updated 11 October 2026 · Fact-checked

Under IFRS 16, a lease is a contract that conveys the right to control the use of an identified asset for a period of time in exchange for consideration. You identify one by checking for an identified asset, the right to obtain substantially all economic benefits, and the right to direct its use.

Understand IFRS 16 Scope and Lease Identification

A lease is a contract, or part of a contract, that gives you the right to control the use of an identified asset for a period of time in exchange for consideration. The key word is control. It is not enough that you use an asset. You must control how it is used.

IFRS 16 asks you to test a contract in three parts. First, is there an identified asset? It is usually named in the contract, or made identifiable when it is made available to the customer. Second, does the customer have the right to obtain substantially all the economic benefits from using the asset throughout the period? Third, does the customer have the right to direct the use of the asset, meaning it decides how and for what purpose the asset is used?

An asset is not identified if the supplier has a substantive right to substitute it. Substantive means the supplier can practically swap it and would gain economically from doing so. If the supplier can substitute only for repair or maintenance, the right is not substantive. If the customer cannot tell whether a right is substantive, it assumes it is not. A capacity portion of an asset is identified only if it is physically distinct, such as a floor of a building.

If the contract is a lease, the lessee normally recognises a right-of-use asset and a lease liability. There are two optional exemptions. A lessee may choose not to apply the main model to short-term leases (a lease term of 12 months or less with no purchase option) and to leases of low-value assets. For these it recognises payments as an expense, usually on a straight-line basis.

Many contracts mix a lease with services, such as a machine plus an operator. You separate the lease and non-lease components and allocate the price between them. A lessee may elect, by class of asset, not to separate them.

Key rules to remember

Definition of a lease: Lease = contract conveying the right to control the use of an identified asset for a period of time in exchange for consideration; All parts must be met. If any one fails, it is a service contract, not a lease.
Three-part control test: Identified asset + right to obtain substantially all economic benefits + right to direct the use; Apply in this order. Stop as soon as one part fails.
Substitution right: Supplier's right is substantive only if it can practically substitute AND would benefit economically; If the right is not substantive, the asset is treated as identified.
Short-term lease: Lease term ≤ 12 months at commencement and no purchase option; A lessee election made by class of underlying asset. Payments are expensed, usually straight-line.
Low-value asset exemption: Assessed on the value of the asset when new, not on the lease payments; Election is made lease by lease. Examples are tablets, small office furniture and phones. Cars and most machinery are not low value.

How to solve IFRS 16 Scope and Lease Identification questions

Use this method for any question asking whether a contract contains a lease or whether an exemption applies.

1Read the contract and note what asset is involved, who supplies it, and for how long.
2Test for an identified asset. Check whether it is specified and whether the supplier has a substantive right to substitute it.
3Test whether the customer obtains substantially all the economic benefits from use throughout the period.
4Test who directs how and for what purpose the asset is used. Look at who makes the key decisions.
5Conclude. If all tests are met, it is a lease. Otherwise it is a service contract, and payments are expensed.
6If it is a lease, check the exemptions: term of 12 months or less with no purchase option, or a low-value asset when new.
7State the accounting result: right-of-use asset and lease liability, or an expense if an exemption is elected.
8Where services are bundled in, say the price must be split between lease and non-lease components.

Quickest way: Three questions and two exemptions

When to use it: Use in objective test questions and as a planning checklist for written scenarios.

Ask: can the supplier substantively swap the asset? If yes, no lease.
Ask: does the customer get virtually all the benefits? If no, no lease.
Ask: does the customer decide how the asset is used? If no, no lease.
If it is a lease, check the term. Twelve months or less and no purchase option allows the short-term exemption.
Check the new value of the asset. Small items allow the low-value exemption.
Write the conclusion in one sentence with the reason.

Common mistakes in IFRS 16 Scope and Lease Identification

Treating any contract to use an asset as a lease.
Students focus on the payments and the use, not on control.
Fix: Always run the three control tests. A service contract can involve an asset without conveying control.
Ignoring the supplier's substitution right.
The substitution wording is buried in the contract details.
Fix: Check it first. If the right is substantive, there is no identified asset and no lease.
Judging low value by the size of the lease payments.
Students see small annual rentals and assume low value.
Fix: Judge the value of the asset when new. A car has a high new value even if rentals are small.
Applying the short-term exemption when there is a purchase option.
Students look only at the 12-month term.
Fix: A lease with a purchase option is not a short-term lease, whatever its term.
Thinking the exemptions are compulsory.
The word exemption sounds mandatory.
Fix: They are elections for the lessee. The short-term election is by class of asset. The low-value election is lease by lease.
Forgetting to separate non-lease components.
The contract has one total price.
Fix: Allocate the price between lease and non-lease parts, unless the lessee elects not to separate by asset class.

Worked examples

Example 1

Alpha Co signs a 3-year contract with Beta Co. Beta must provide Alpha with a specific delivery van, identified by registration number, for Alpha's exclusive use. Alpha decides the routes, loads and times of use. Beta can substitute the van only if it breaks down. Does the contract contain a lease?

Show the solution

Identified asset: the van is specified by registration number. Beta can substitute only for breakdown, which is not a substantive right. So the van is identified.
Economic benefits: Alpha has exclusive use for 3 years, so it obtains substantially all the benefits.
Right to direct use: Alpha decides routes, loads and times, so it directs how and for what purpose the van is used.
All three tests are met, so control passes to Alpha.

Answer: The contract contains a lease. Alpha is the lessee and, subject to the exemptions, recognises a right-of-use asset and a lease liability.

Example 2

Gamma Co leases (a) a warehouse floor for 8 months with no purchase option, (b) 20 laptops, each costing about $900 when new, for 4 years, and (c) a production machine costing $400,000 when new for 10 months with no purchase option. Which leases can use an exemption if Gamma elects to?

Show the solution

(a) Term is 8 months, which is 12 months or less, with no purchase option. It qualifies as a short-term lease.
(b) Term is 4 years, so it is not short-term. Each laptop is a low-value asset when new at $900. Low value is assessed asset by asset, so the exemption is available.
(c) Term is 10 months with no purchase option, so it meets the short-term test. Asset value is irrelevant to this exemption.
If elected, payments for all three are expensed, usually on a straight-line basis.

Answer: All three can use an exemption if Gamma elects to: (a) and (c) as short-term leases, and (b) as low-value assets. The machine does not qualify as low value, but it does qualify as short-term.

Exam tips

In scenarios, hunt for the substitution clause, the exclusivity wording and who decides use. These are the facts the examiner plants.
Write the conclusion for each of the three tests in a short line. Marks follow each test, not just the final answer.
In objective tests, check the exemption traps: purchase option, value when new, and whether the asset is part of a larger set.
Say that the exemptions are elections and the expense is normally straight-line. Do not say they are compulsory.
When a contract bundles services, say the price is allocated between lease and non-lease components.

Practice questions from Leasing

IFRS 16 Scope and Lease Identification in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

ACCA Strategic ProfessionalIFRS 16 Scope, Definition and Identifying a Lease

IFRS 16 Scope and Lease Identification: frequently asked questions

What is the definition of a lease under IFRS 16?

A lease is a contract, or part of one, that conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Control means the customer gets substantially all the economic benefits and directs the use.

How do I know if a supplier's substitution right is substantive?

It is substantive if the supplier can practically substitute the asset throughout the period and would gain economically from doing so. A right that only applies for repairs or maintenance is not substantive. If the customer cannot tell, it treats the right as not substantive.

Does the low-value exemption depend on the lease payments?

No. It depends on the value of the underlying asset when new. Small items like tablets or phones usually qualify. Cars do not, even if the rentals are small.

Can a lessee choose to account for short-term leases under the main model?

Yes. The exemption is an election, made by class of underlying asset. If the lessee does not elect, it applies the normal right-of-use and lease liability model.