ACCA Strategic Professional · Strategic Business Reporting (International) · Leases
Delta Co leases a retail unit in a shopping centre for ten years. The lease allows the landlord to relocate Delta to any other unit of similar size in the centre on six months' notice, but relocation would cost the landlord significant fitting-out expense and would only be done if a major tenant demanded the space, which is considered unlikely. What is the effect on identifying the lease?
A lease exists. The landlord's relocation right is not substantive because substitution would cost significantly more than any benefit and is unlikely to happen. The unit therefore remains an identified asset, and Delta applies IFRS 16 to the retail property lease.
- AThe substitution right is substantive, so there is no lease
- BThe substitution right is not substantive, so the unit is an identified asset and a lease existsCorrect
- CThe contract is a lease only for the first six months
- DThe contract is outside IFRS 16 because it is for property
Explanation
A substitution right is substantive only if the supplier has the practical ability to substitute and would benefit economically. Here the costs outweigh benefits and relocation is unlikely, so the right is not substantive. The unit is therefore an identified asset and the lease is within IFRS 16, which covers property.
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