Warehousing revenue and lease income

Where a warehousing arrangement gives the customer the right to control use of an identified space, it may be (or contain) a lease under IFRS 16 rather than a service contract under IFRS 15, changing both revenue timing and balance sheet presentation for the warehouse operator. Misclassifying can misstate revenue recognition patterns, omit lessor disclosures, and misrepresent the operator's exposure to underutilized capacity.

Is a physically distinct storage space identified in the contract (explicitly or implicitly), and does the customer direct how that space is used and obtain substantially all of its economic benefits, or can the operator substitute space at will with both the ability and incentive to do so? If a lease component exists alongside a service component (handling, pick-and-pack), how is the total consideration allocated between them, and is lease income recognized on a systematic (typically straight-line) basis separate from output-based service revenue?

1) Determine whether a physically distinct space is identified in the contract (explicitly or implicitly) or whether the operator can substitute space at will with both the practical ability and economic benefit to do so. 2) Assess whether the customer has the right to obtain substantially all economic benefits from use of the identified space over the period. 3) Assess whether the customer directs the use of the space (what is stored, how, and when goods move) or whether the operator retains substantive decision rights. 4) If both an identified asset and control criteria are met, classify (or separate) the lease component; otherwise treat as a service. 5) Where a single contract combines a lease of space and non-lease services (handling, security, inventory management), allocate consideration between the lease and non-lease components using observable standalone prices. 6) For the lease component, recognize lease income (as lessor) generally straight-line over the lease term unless another systematic basis better reflects the pattern of benefit.

For the lease component, measure lease income on a systematic basis (typically straight-line) over the lease term. For the service component, measure and recognize revenue as those services (storage, handling, pick-and-pack) are performed, using an appropriate output or input method. Allocate the total contract consideration between lease and non-lease components based on relative observable standalone selling prices, or an estimate thereof if not directly observable.

Disclose: (1) the nature of significant warehousing arrangements and the judgment applied in classifying them as leases versus service contracts; (2) lease income presented separately from service revenue; (3) for lease components, the lessor disclosures required by IFRS 16 (e.g. maturity of lease payments to be received); (4) the allocation methodology used to split consideration between lease and non-lease components.

• Treating all warehousing contracts as service revenue by default without assessing whether an identified asset and control criteria are met
• failing to split combined lease and service components, recognizing the entire fee under one pattern
• assuming a lease exists merely because a fixed monthly fee is charged, without checking substitution rights
• applying a service revenue pattern (e.g. even monthly recognition) to a component that is actually a lease with straight-line income recognition nuances (e.g. rent-free periods).