Heavy equipment and labor camp leases

Contractors historically expensed crane, generator and labor-camp rentals as incurred; under IFRS 16 almost all such arrangements (beyond genuinely short-term or low-value items) require a right-of-use asset and lease liability on-balance-sheet, which changes EBITDA (rent expense is replaced by depreciation and interest), inflates gross assets and liabilities, and directly affects debt covenants (gearing, current ratio) that lenders monitor closely on already leveraged contracting balance sheets.

Does the arrangement give you the right to control the use of a specific, identified crane, generator, or camp (rather than an interchangeable pool of equipment) for a period of time? Do you direct how and for what purpose the identified asset is used throughout that period? Does the arrangement qualify for the short-term (12 months or less) or low-value asset exemption, or must a right-of-use asset and lease liability be recognized? Is the discount rate used to measure the lease liability appropriate given the project's currency, term, and your incremental borrowing rate?

1. Identify whether the arrangement is a lease: does it convey the right to control the use of an identified asset (a specific crane or camp, not an interchangeable pool) for a period in exchange for consideration?
2. Apply the short-term exemption (lease term of 12 months or less at commencement, including renewal options reasonably certain to be exercised) and the low-value asset exemption (assessed on an absolute basis, e.g. small tools) where genuinely applicable; do not apply low-value to heavy plant.
3. For all other leases, recognize a right-of-use asset and a lease liability at the commencement date based on the lease term (including reasonably certain extension/termination options tied to project duration).
4. Separate lease and non-lease components (e.g. crane rental versus operator/maintenance services) unless applying the practical expedient to combine them.
5. Reassess the lease term and remeasure the liability if project duration extends materially or an option's exercise becomes reasonably certain.

Measure the lease liability at the present value of remaining lease payments discounted at the rate implicit in the lease or, more commonly for contractors where that rate is not readily determinable, the entity's incremental borrowing rate reflecting the project's currency, term and the lessee's credit standing. Measure the right-of-use asset at the amount of the lease liability plus initial direct costs, prepayments and estimated dismantling/restoration costs, less lease incentives; depreciate over the shorter of the lease term and useful life. Subsequently increase the liability for interest and reduce it for payments made; remeasure both the liability and asset for lease modifications or reassessed terms.

Disclose: (1) right-of-use assets by class of underlying asset (equipment, camps, offices), separately from owned PP&E or as a separate line; (2) lease liabilities split current/non-current; (3) depreciation charge on right-of-use assets and interest expense on lease liabilities, separately from other depreciation/finance costs; (4) total cash outflow for leases; (5) short-term and low-value lease expense recognized on a straight-line basis; (6) information about variable lease payments not included in the liability, extension/termination options, and residual value guarantees.

• Continuing to expense heavy equipment rentals monthly as an operating cost because the arrangement is invoiced monthly, without assessing whether it meets the lease definition
• applying the low-value exemption to major cranes or batching plants because individual monthly payments look small, rather than assessing the underlying asset'
• s value when new
• failing to include reasonably certain extension options in the lease term when project delays make continued use highly likely
• not separating embedded service components (operator, maintenance, fuel) from the lease payment, overstating the lease liability
• missing site restoration/dismantling obligations embedded in camp or facility leases that should be included in the right-of-use asset cost.