At times there may be a contract that looks like a lease but may
not be a lease according to IFRS 16 can you describe the difference
and list some situation where it may occur? (200 words)
Under IFRS 16, a contract may look like a lease but may not be considered one, leading to differences in accounting treatment. The main distinction lies in whether the contract transfers the right to control the use of an identified asset to the lessee. If control is transferred, the contract is a lease and falls under IFRS 16. If not, it is not considered a lease.
Situation 1: Service Contracts - Some contracts involve the provision of both an asset and services. If the contract primarily provides services and the lessor does not transfer the right to control the use of the asset, it would not be considered a lease. For example, a contract with a copier supplier where the supplier provides both the copier and maintenance services would not be a lease.
Situation 2: Supply Contracts - In certain cases, a contract may involve the supply of an asset without transferring the right to control its use. For instance, a contract with a supplier who delivers inventory to a retailer without giving the retailer control over the inventory usage would not be a lease.
Situation 3: Temporary Usage - If an arrangement involves the use of an asset for a short period where the lessor retains control and does not transfer the right to control the asset's use to the lessee, it may not be considered a lease. For example, renting a meeting room for a few hours where the lessor retains control over the space would not be a lease.
Situation 4: Financing Arrangements - Sometimes, a contract involves financing the purchase of an asset, such as a hire-purchase agreement. In these cases, the lessor retains control over the asset, and the lessee does not have the right to control its use. Consequently, this would not be classified as a lease.
It is crucial to carefully analyze the terms of each contract to determine if it meets the definition of a lease under IFRS 16.