Lessee accounting for equipment and site facilities

Contractors run on leased plant, and multi-year equipment and camp leases materially change the balance sheet (right-of-use assets and lease liabilities) and the income statement pattern (depreciation and interest replacing a single rental expense line); misclassifying rolling rentals as short-term or wet-lease services as capitalizable leases directly misstates leverage ratios and EBITDA used in bank covenants and bid qualification. Given how structurally dependent regional contracting is on equipment rental and labor camps, this is a high-frequency, high-judgment area.

Do any equipment or camp rentals in substance continue across the project or beyond 12 months, even if structured as rolling monthly agreements? Does the contractor direct the use of an identified asset, or is it instead buying a service (e.g. equipment with an operator under the supplier's control)? Is the lease term set at the realistically expected remaining project duration rather than the shortest contractual notice period? Is the right-of-use asset and lease liability remeasured when renewal becomes reasonably certain or when index/rate-based payments change?

1) For each rental arrangement, first test whether it contains a lease: is there an identified asset, and does the contractor direct its use and obtain substantially all the economic benefits (versus buying a service where the supplier controls how the asset/labor is used, as in a wet-leased crane with operator under the supplier's direction)? 2) If a lease exists, check the short-term (12 months or less, no purchase option) and low-value asset exemptions; do not apply the short-term exemption to a rolling monthly arrangement that is, in substance, expected to continue across the project or beyond 12 months. 3) Determine the lease term using the realistic, non-cancellable period plus renewal options reasonably certain to be exercised - for equipment/camps tied to project duration, align the term with the project's realistically expected remaining duration, not the shortest contractual notice period. 4) At commencement, recognize a right-of-use (ROU) asset and a lease liability measured at the present value of remaining lease payments, discounted at the rate implicit in the lease or, if not readily determinable, the lessee's incremental borrowing rate. 5) Subsequently depreciate the ROU asset (typically straight-line over the lease term) and unwind the lease liability using the effective interest method; remeasure both on lease modifications, reassessed renewal likelihood, or index/rate-based payment changes. 6) Expense short-term and low-value lease payments, and variable payments not based on an index/rate, on a straight-line or as-incurred basis as applicable.

Measurement base: the lease liability is initially measured at the present value of remaining lease payments (fixed payments, in-substance fixed payments, index/rate-based variable payments at the rate at commencement, and amounts under purchase/extension options reasonably certain to be exercised), discounted at the rate implicit in the lease or the lessee's incremental borrowing rate. The right-of-use asset is initially measured at cost: the initial lease liability, plus payments made at or before commencement, initial direct costs, and estimated restoration/dismantling costs, less any lease incentives received. Subsequent measurement: the ROU asset is depreciated (typically straight-line) over the shorter of the lease term and useful life, and tested for impairment under IAS 36; the lease liability is measured at amortized cost using the effective interest method, reduced by payments and increased by accrued interest, with remeasurement (adjusting the ROU asset) on lease modifications, changes in assessed lease term, or changes in index/rate-based payments.

Present right-of-use assets by class (equipment, camps, premises) either on the face of the balance sheet or in the notes, separately from owned PP&E; present lease liabilities separately from other financial liabilities, split current/non-current; disclose depreciation charge by class of ROU asset, interest expense on lease liabilities, and expense for short-term, low-value and variable lease payments not included in the liability; disclose total cash outflow for leases and any significant judgments (e.g., lease term determination, extension options considered reasonably certain); disclose additions to ROU assets and any impairment recognized under IAS 36.

• Treating rolling monthly crane or equipment rentals that in substance run for years as short-term leases simply because each renewal cycle is under 12 months
• capitalizing wet-lease arrangements (equipment with an operator under the supplier'
• s control and direction) as if they were a lease, when they are in substance a service contract
• setting the lease term at the shortest contractual notice period while ignoring near-certain project extensions that make continuation highly likely
• failing to reassess and remeasure the lease liability and ROU asset when renewal becomes reasonably certain partway through the arrangement
• omitting camp and site-facility leases from the ROU population because they are viewed as '
• temporary'
• project costs rather than leases.