Lease accounting for industrial facilities

Factories on leased industrial land, rented warehouses and vehicle fleets go on balance sheet under IFRS 16; long land leases raise term and renewal-option questions that materially affect the lease liability (leverage ratios) and ROU asset (asset base). Underestimating the term for non-relocatable land understates debt-like liabilities and long-term assets, distorting leverage covenants and peer comparability.

For long industrial land leases, has the lease term been assessed based on renewal options reasonably certain to be exercised (considering dedicated plant built on the land and lack of alternative sites), not just the stated non-cancellable period? What discount rate (incremental borrowing rate, since the implicit rate is rarely available) is used to measure the lease liability? Are short-term or low-value equipment rentals correctly expensed rather than capitalized?

1. Identify all arrangements conveying the right to control the use of an identified asset for a period of time in exchange for consideration, not just contracts explicitly labelled 'lease'.
2. Apply the recognition exemptions where applicable: short-term leases (12 months or less, no purchase option) and low-value asset leases may be expensed rather than capitalized.
3. For all other leases, recognize a right-of-use (ROU) asset and a lease liability at commencement.
4. Determine the lease term: the non-cancellable period plus renewal periods reasonably certain to be exercised and termination periods reasonably certain not to be exercised - for industrial land where relocating is impractical, this often extends the term well beyond the stated initial period.
5. Assess whether the contract contains lease and non-lease components and allocate consideration unless a practical expedient not to separate is elected.
6. Remeasure the lease liability and ROU asset upon a change in lease term, purchase option assessment, or residual value guarantee amounts.
7. Reassess index-linked variable payments when the relevant index or rate actually changes.

Measurement basis: the lease liability is the present value of unpaid payments discounted at the rate implicit in the lease or, if unavailable, the incremental borrowing rate. Included: fixed payments, in-substance fixed payments, index-linked variable payments at commencement rates, residual value guarantees, reasonably certain option prices. Excluded: non-lease components (unless not separated) and genuinely variable usage-based payments, expensed as incurred. Remeasurement triggers: lease modification, reassessment of term/purchase option, or index changes once they actually occur.

ROU assets presented by class (land, buildings, vehicles, equipment); lease liabilities split current/non-current; maturity analysis of undiscounted payments; depreciation and interest expense disclosed separately; expense for variable payments, short-term and low-value leases; significant judgments on lease term for long industrial land leases with renewal options.

• Treating long industrial land leases as simple executory rentals instead of capitalizing ROU and liability
• ignoring in-substance renewal certainty where relocation is impractical
• omitting embedded leases within broader service contracts
• failing to remeasure the liability when index-linked rent actually changes
• misapplying the low-value exemption to large fleets assessed in aggregate.