IFRS 16: shipping contracts and the use of a ship
The IFRS Interpretations Committee (IFRS IC) received a submission asking whether a customer has the right to direct the use of a ship throughout the five years of a contract.
Keywords: Mazars, Thailand, IFRS, IFRS IC, IFRS 16, Shipping contracts
24 March 2020
The fact pattern described in the submission is as follows:
- there is an identified asset (the ship);
- the customer has the right to obtain substantially all the economic benefits from use of the ship;
- many, but not all, of the decisions about how and for what purpose the ship is used are predetermined. The customer has the right to make the remaining decisions, which are relevant because they affect the economic benefits to be derived from use of the ship;
- the supplier operates and maintains the ship throughout the contract term.
The question is whether the contract contains a lease under IFRS 16, and the Committee published a final agenda decision on the matter in January 2020.
The Committee noted that not all the relevant decisions are predetermined and that the customer must thus assess whether it has the right to direct the use of the leased asset, i.e. the right to direct how and for what purpose the ship is used throughout the period of use (cf. IFRS 16 B24 (a)).
In this specific case, the Committee noted that the customer does have this right, because it is the customer that makes the relevant decisions affecting the economic benefits to be derived from use of the ship. The scope of the customer’s right of use is limited by the decisions predetermined in the contract, but the customer still has the ability to make the decisions that are most relevant to changing how and for what purpose the ship is used, within the scope of the contract.
The Committee observed that the supplier’s decisions relating to the operation and maintenance of the ship are essential to its efficient use, but do not give the supplier the right to decide how and for what purpose the ship is used.
The Committee therefore concluded that the customer has the right to direct the use of the ship, and the contract thus contains a lease as defined in IFRS 16.