54 December 2020 Applying IFRS - A closer look at IFRS 16 Leases
(i.e., lease payments) and, therefore, in the determination of the gain or loss on
derecognition of the underlying asset, if any.
Interest on the deposit is accounted for using the effective interest method by
both the lessee and the lessor.
3.5.10 Value added tax and property taxes
When a lessee enters into a lease contract the lessor may be required to
charge the lessee VAT in accordance with the local tax regulations. In many
jurisdictions, the lessor charges VAT on behalf of the tax authority and payment
is remitted to the tax authority. In circumstances when the VAT is the obligation
of the lessee (i.e., not the lessor’s obligation) the VAT charged is not a lease
payment from the perspective of the lessor. From a lessee’s perspective,
typically the lessee only incurs a liability for the VAT when the lessor invoices
the lease payment. In some cases, VAT is not fully recoverable by the lessee,
usually because either the activities of the lessee prohibit the recovery of VAT
or recovery is prohibited due to the nature of the leased asset. Generally, we
expect that lessees will not include VAT in lease payments in these situations.
Non-recoverable VAT payments are in the scope of IFRS 21
Levies
.
In some circumstances, a lessee may enter into a contract to lease property
and the lessor is required to pay property taxes levied by a local government
authority. The lease contract may specify that the lessee pays an additional
amount to cover the lessor’s tax costs. Property tax that is reimbursable by the
lessee to the lessor as the owner of the office building, according to the contract,
does not transfer any goods or services to the lessee and, as such, it is not a
separate component of the contract. Rather, it is part of the total consideration
and should be allocated to the separately identified components of the contract.
Unlike the non-recoverable VAT payments discussed above, the property tax
reimbursable by the lessee to the lessor is not a collection of tax by the lessor
on behalf of the tax authority. The obligation to pay the property tax rests with
the lessor as the owner (regardless of whether the lessee ends up making any
payments to the lessor). That is, the property tax is a cost of ownership and the
lessee’s payment to the lessor simply compensates the lessor for the use of the
office building.
3.5.11 Co-tenancy clauses
A co-tenancy clause is a clause in a lease contract that could result in changes
in a lessee’s lease payments if certain events involving other tenants occur (e.g.,
if key tenants, or a certain number of tenants, leave a retail shopping centre).
A co-tenancy clause, if triggered, may temporarily reduce a lessee’s lease
payments or contractually change the lease payments from fixed lease
payments to variable lease payments (e.g., payments that were previously fixed
are changed to a percentage of sales). Generally, when the co-tenancy clause
is resolved (e.g., the anchor tenant is replaced or occupancy levels return to a
stated percentage), the lease payments will revert back to the previous amounts.
If after lease commencement, a co-tenancy clause is triggered, we believe
a lessee generally would not remeasure the lease payments. IFRS 16 requires
a lessee to remeasure lease payments when a contingency, upon which some
or all of the variable lease payments that will be paid over the remainder of the
lease term are based, is resolved and those payments now meet the definition
of lease payments. A co-tenancy clause would typically result in the inverse
scenario because it would temporarily lower the lease payment or temporarily
cause fixed payments to become variable. Therefore, we believe any temporary