Subsurface rights and IFRS 16

Keywords: Mazars, Thailand, IFRS, IFRS 16, IFRS IC

26 August 2019

The request asked whether this contract met the IFRS 16 definition of a lease, given that:

• the contract specifies the exact location and dimensions (path, width and depth) of the underground space within which the pipeline is placed;
• the landowner retains the right to use the surface of the land above the pipeline, but it has no right to access or otherwise change the use of the specified underground space throughout the 20-year period of use;
• the customer has the right to perform inspection, repairs and maintenance work (including replacing damaged sections of the pipeline when necessary).

It’s no real surprise that the Committee, whose agenda decision has just been published in the June 2019 IFRIC Update, concluded that this is indeed a lease to be recognised under IFRS 16, because:

• the underground space is physically distinct from the rest of the land, and the landowner has no real right of substitution;
• the customer has the right to obtain substantially all the economic benefits from use of the underground space, since it enjoys its exclusive use;

the customer has the right to direct the use of the underground space throughout the use period, under the conditions predetermined in the contract.