Ifrs 16 Leases Mining

IFRS
for mining
IFRS 16 Leases
Practical application guidance
February 2018
KPMG.com.au
2 IFRS for mining | IFRS 16 Leases – Practical application guidance
Foreword
Welcome to KPMG’s series of mining industry
accounting thought leadership, IFRS for Mining.
These publications are focused on topical accounting

issues and designed to provide finance teams with
an overview of the key technical aspects of the
matter and their application to the mining industry,
including practical examples in a simple to interpret
format. They are not designed to cover every aspect
of the subject matter but provide a sound practical
understanding, industry examples and access to tools
to interpret the impact on your business.
IFRS 16 Leases is effective from 1 January 2019 and is
an important change for all industries and mining is no
different, particularly given the significant use of capital
equipment. The standard is designed to provide greater
clarity to preparers and users of financial statements
and will result in most leases being recognised on
balance sheet.
International standard setters have made changes to the
identification, recognition and presentation of leases.
Accordingly, a significant amount of additional detail and
interpretation has been introduced. With this additional
detail comes a need to fully understand the terms of
existing and future contracts as the outcomes will differ
based on the specific contractual arrangements.
This guide includes many industry examples and
practical considerations as the mining industry
participants work through the industry interpretations
and impacts. We trust that you find this guide practical
and helpful in your journey to implement the new IFRS
16 Leases standard.
KPMG Australia Mining Team

Part of the KPMG Global Mining Institute
For more information about the requirements of IFRS 16

Leases, refer to related KPMG resources on page 47
IFRS for mining | IFRS 16 Leases – Practical application guidance 3

© 2018 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights
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Executive summary
Executive Summary
Executive summary
IFRS 16: What do I need to know?

Headlines
–– Key financial metrics will be affected by the recognition of new assets
and liabilities, and differences in the timing and nature of lease expenses
–– Lease definition replaces lease classification as the key on-/off- balance
sheet test
IFRS 16 requires
–– There will be an increased focus on whether an arrangement contains
a lease and possible changes to whether transactions, such as service that most leases are
arrangements, contain leases recorded on balance
–– The impact may be broader than the finance team as key contract terms,
sheet
such as variable pricing mechanisms, will impact the value of leases on
balance sheet
–– There are multiple transition options and practical expedients.
The transition method chosen may have a major impact on the cost of
implementation and longer term effect of leases on the financial statements
Financial metrics impacted Transition decisions
–– Profit before/after tax and non-IFRS measures such as –– Whether to grandfather the lease definition on transition
EBIT/EBITDA*
–– Full retrospective or modified retrospective with optional
–– Depreciation/amortisation and interest expense practical expedients
–– Total assets and total liabilities Grandfathering provides a company relief from reassessing
whether existing arrangements contain leases.
A change in financial metrics may impact a company’s bank
covenants and KPIs including those affecting bonus structures. Whether to grandfather the lease definition and which
transition option to apply may significantly impact the cost
Communication with stakeholders requires careful
of implementation and comparability of financial results.
consideration.
Section 7
Section 3
* Earnings Before Interest, Tax, Depreciation and Amortisation as a non-

IFRS measure
Contracts affected by the change may include
Service contracts which Shipping/transport Mining services/

include use of assets contracts construction contracts
Mine camp
Rental contracts Power supply contracts
arrangements

Executive summary
Accounting for leases
There are a number of changes to lease accounting applying the requirements of IFRS 16, those resulting in
specific implementation issues for the mining industry are covered within this publication. The key changes
include:
Lease and non lease Mining services
Lease accounting Lease definition
components contracts
New assets and liabilities Additional guidance and Lessees allocate Mining services
recognised on balance examples on application consideration to arrangements often depend
sheet for most leases. of the definition, such as components based on on plant and equipment
whether: relative stand alone prices owned and operated by
Variable pricing
whilst a lessor follows the the contractor.
mechanisms significantly –– a substitution right is
principles of IFRS 15.
impact the value of leases substantive (practical Careful consideration of
on balance sheet. and economically Lessees can choose by the lease definition will be
beneficial); and class of underlying asset, required to assess whether
Section 3, 4
to account for contracts contracts contain leases.
–– a customer controls
which contain lease and
an asset. Section 8
non-lease components as
Arrangements which leases in their entirety.
contain leases may change.
Section 2
Section 1
Transition plan
The impact and relative effort required to implement the new standard will vary depending on the transition
option selected but should not be underestimated. A key early decision is how to transition to the new
standard. Some of the key tasks to include in your implementation plan include:
Current state assessment Evaluation of contracts Transition options Disclosure requirements
–– Build a database of –– Develop IFRS 16 –– Model the impact of –– Disclose the impact of
all existing leases and assessment process for transition options on the new standard in
contracts that may existing contracts financial metrics financial reports prior
contain a lease to the date of initial
–– Consider engaging –– Select transition option,
application
–– Consider completeness with key business considering the relative
of existing lease stakeholders outside of comparability and other –– Prepare for an increase
portfolio the finance team benefits of available in the disclosure burden
options for both lessees and
lessors
KPMG can help
Assess the impacts Help design a tailored approach Help implement a future state
Refer to page 46 for further information about how

KPMG can help, including tips and tools.

Contents
Which arrangements contain leases?....................................... 10
1 Lease definition.................................................................... 11
1.1 Is there an identified asset?.......................................... 12
1.2 Does the customer obtain substantially all

of the economic benifits?.............................................17
1.3 Who has the right to direct the use of the asset? �� 19
2 Lease and non-lease components...................................... 23
Accounting for leases................................................................. 26
3 Lessee accounting............................................................... 27
4 Lessor accounting................................................................ 30
Other considerations.................................................................. 32
5 Joint arrangements............................................................. 33
6 Other financial reporting considerations........................... 34
7 Transition method............................................................... 35
8 Case study – Mining services contract............................... 36
9 Next steps and other resources.......................................... 44
9
Which arrangements
contain leases?
A key judgement
Assessing whether an arrangement is, or
contains, a lease will be one of the biggest
practical issues when applying IFRS 16.
In many cases, the assessment will be
straightforward, and a transaction that is a
lease today will be a lease under the new
standard. In other cases, the assessment
will be more complex, and the conclusion
on whether an arrangement is, or contains,
a lease may change.
Companies should not underestimate the

task ahead.

Which arrangements contain leases?
1 Lease definition
A lease is a contract, or part of a contract, that conveys the right to use an asset (the
underlying asset) for a period of time in exchange for consideration. If a contract contains
a lease, then it will generally be on-balance sheet for the lessee.
The question of whether an arrangement is, or contains, a lease determines whether the
arrangement is recognised on or off-balance sheet for lessees. The finance and operating
lease classification test from IAS 17 Leases no longer applies to lessees but is however
retained for lessors¹.
The key elements and some of the key considerations of the definition are as follows,
all elements of the definition must be met in order for there to be a lease.
Is there an identified asset?

–– Specified asset (Section 1.1.1) No
Step 1 –– Capacity (Section (1.1.2)
–– Substantive supplier substitution right (Section 1.1.3)
Yes
Step 2 Does the customer obtain substantially all of the No
economic benefits? (Section 1.2)

Control over the use of
Yes
the identified assets
Who has the right to direct the use of the asset – i.e.
Step 3 who makes the “how and for what purpose” decisions?
Customer Predetermined Supplier
Contract does
Contract is or Further analysis
not contain a
contains a lease is required
lease
Observation
IFRS 16 has an increased focus on who has

the right to control the use of an identified
asset, and contains additional application
guidance and illustrative examples on
right to direct the use, plus more explicit
guidance on whether there is an asset.
1 Refer to section 4 for further information.

Step 1
Practical expedient
On transition, there are a number of 1.1 Overview

options available to companies. The For a lease to exist, there has to be an identified asset,
practical expedient to grandfather previous determined as follows:
assessments under IAS 17 and IFRIC 4
Determining whether an Arrangement
contains a Lease of which contracts are,
or contain, leases, offers considerable
relief on transition. Without this relief, Is the asset specified No
companies would be required to reassess (explicitly or implicitly)?
all previous decisions about which contracts (Section 1.1.1)
are, or contain, leases applying the IFRS 16
lease definition. This practical expedient is Contract does
therefore likely to prove popular. Yes
not contain a
lease. Apply
If this practical expedient is applied, the other IFRSs
IFRS 16 definition of a lease is applied only Is the asset physically
to contracts entered into from the date of distinct or does the No
initial application. From the date of initial customer have the right to
application, lease accounting under IFRS receive substantially all of
16 is applied to all leases, including those the capacity of that asset?
identified applying the requirements of IAS (Section 1.1.2)
17 and IFRIC 4. Refer to section 7 for further
discussion over transition. Yes
Does the supplier have No

There is an
identified
substantive substitution
asset, go to
right? (Section 1.1.3) section 1.2
Observation
Yes
A robust process is required to ensure all
leases were identified under IAS 17 and
IFRIC 4 for contracts entered into prior to Contract does not contain a
the date of initial application of IFRS 16. lease. Apply other IFRSs
During the course of the IFRS 16
implementation project, it is possible that
some companies will identify leases in
existing contracts, under IAS 17 and IFRIC 4.
1.1.1 Specified asset
A contract contains a lease only if it relates to an identified
asset. There may be an identified asset if there is a specified
asset. An asset can be either explicitly specified in a contract
or is implicitly specified at the time it is made available for
use by the lessee.

Example 1.1.1.1 – Remote site power purchase

contract: Asset is specified
Question: What does implicitly
It is common for mining companies to operate in specified mean?
remote locations. A power plant may be an implicitly
An asset is implicitly specified if the facts
specified asset in a power purchase contract if the
and circumstances indicate that the supplier
customer’s facility is in a remote location with no
can fulfil its obligations only by using a
access to the grid, such that the supplier cannot buy specific asset.
the required energy in the market or generate it from
alternative power plants.
Example 1.1.1.2 – Mining equipment contract: Asset

is specified
Question: Does an asset need to be
A supplier may enter into a binding contract to
specified at contract inception?
supply an excavator to a customer for use on the
customer’s mine site in six months time. The specific No, the key test is whether the asset is
excavator is not identified at the date of signing the specified at the time when it is made
contract, the supplier has four excavators of a similar available to the customer.
specification that could be used to fulfil the contract.
All four excavators are at a similar distance from the
customer’s mine site. However, once a given excavator
is transported to the mine site, only that excavator can
be used to fulfil the contract. In this case, although the
contract does not initially specify which excavator will
be used to fulfil the contract, the individual excavator
is specified when it is made available to the customer.

1.1.2 Capacity portions

In many cases, the asset subject to the contract will be the
entire underlying asset and therefore easy to identify (e.g. a
Observation
building or a piece of equipment). However, a portion of an
IFRIC 4 did not address capacity portions, asset’s capacity can be an identified asset if:
resulting in diversity in practice. The
requirements of the IFRS 16 lease –– it is physically distinct (e.g. a floor of a building or a
definition are new, therefore the impact specified strand of a fibre-optic cable); or
will depend on the how an entity previously –– it is not physically distinct, but the customer has the right
approached capacity portions in a lease
to receive substantially all of the capacity of the asset
identification assessment under IFRIC 4.
(e.g. a capacity portion of a fibre-optic cable that is not
physically distinct but represents substantially all of the
capacity of the cable).
Example 1.1.2.1 – Warehouse storage: Capacity

Question: What does ‘substantially portion is not an identified asset
all’ mean?
The new standard does not define
Zinc miner A enters into an arrangement with Storage
‘substantially all’ in the context of the Co B for the right to store zinc at B’s specified
definition of a lease. US GAAP allows the use warehouse at a port. The warehouse has no separate
of a threshold of 90 percent for ‘substantially compartments. At inception of the contract, A has
all’. Although 90 percent may provide a storage rights which permit it to use up to 40% of the
useful reference point, it does not represent capacity of the warehouse throughout the term of the
a bright-line or automatic cut-off point under contract. B can use the other 60% of the warehouse
IFRS. For the purpose of applying the lease as it sees fit.
definition, a company should develop an
interpretation of ‘substantially all’ and apply In this scenario, there is no identified asset. This is
it on a consistent basis. because A only has rights to 40% of the warehouse’s
capacity and that capacity portion is neither physically
distinct from the remainder of the warehouse nor
‘substantially all’.
Example 1.1.2.2 – Warehouse storage: Capacity

portion is an identified asset
Contract miner C enters into an arrangement with
Mining Co D for the right to store equipment spare
parts at a specified storage warehouse. Within this
warehouse, rooms 1 and 2 are contractually allocated
to C for its exclusive use. D has no substitution rights.
Rooms 1 and 2 represent 40% of the warehouse’s
total storage capacity.
In this scenario, there is an identified asset even
though C is using only 40% of the warehouse’s total
storage capacity. This is because:
–– the rooms are explicitly specified in the contract;
–– the rooms are physically distinct from the other
storage rooms within the warehouse; and
–– D has no substitution rights.

1.1.3 Substantive supplier substitution rights

Even if an asset is specified in a contract, a customer does
not have the use of an identified asset if the supplier has a
substantive right to substitute the asset for an alternative Observation
asset throughout the period of use.
Substitution rights is one of the key areas
A supplier’s substitution right is ‘substantive’ if the supplier: of focus in applying the lease definition.
Some elements of substitution are often
–– has the practical ability to substitute the asset throughout
permitted in leases of fleets of vehicles
the period of use; and
or equipment and the guidance which the
–– would benefit economically from exercising its right to new standard provides is more detailed.
substitute the asset. Under IFRS 16 a right is substantive only
if the lessor (supplier) would benefit
economically from substitution, whereas
IFRIC 4 required only that substitution is
‘economically feasible’.
Example 1.1.3.1 – Trucking: Substitution rights are This suggests that demonstrating a
substantive substantive substitution right will be a higher
hurdle under the new standard than under
Nickel miner E enters into a five-year contract with a IFRIC 4 as a result of the additional guidance.
transport carrier (Supplier F) to transport a specified
quantity of nickel ore. F uses trucks of a particular
specification that are stored at its premises and has a
large fleet of similar trucks that can be used to fulfil the
requirements of the contract.
The trucks are stored at F’s premises and F has a large
Question: What if a customer cannot
fleet of similar trucks, in this case it appears that F has readily determine whether a supplier has
the practical ability to substitute the trucks. a substantive substitution right?
Costs associated with substituting the trucks are The customer should presume that any
minimal for F. Relevant experience demonstrates that: substitution right is not substantive.
–– F benefits economically from being able to deploy
alternative trucks as necessary to fulfil customer
needs; and
–– the conditions that make substitution economically
beneficial (e.g. the nature and mix of different
customer needs for F’s assets) are likely to continue
throughout the period of use.
As F has the practical ability to substitute the trucks and
their substitution is economically beneficial throughout
the period of use, F’s substitution rights are substantive
and the arrangement does not contain a lease.

Example 1.1.3.2 – Underlying asset is significantly

customised: Substitution is not substantive
Observation
Underground gold miner G enters into an arrangement
Judgement will be required to evaluate with Supplier H for a significantly customised
whether the economic benefits will outweigh underground crusher to crush ore mined. H has the
the costs of substitution because the analysis right to substitute the crusher without G’s consent
is performed from the supplier’s perspective. throughout the term of the contract. There are no other
It is more difficult for the customer similarly customised underground crushers in the
to determine whether the supplier’s supplier’s portfolio, nor readily available from
substitution right is substantive. other suppliers.
In this scenario, the substitution right is not substantive
because a similarly customised underground crusher
is not readily available and therefore H does not have
the practical ability to substitute. Therefore, there is an
identified asset.
Question: Is a supplier’s right or
obligation to substitute the asset for
repairs and maintenance a substantive Example 1.1.3.3 – Mining equipment lease:
substitution right? Substitution right is not substantive
No, a right to substitute the asset because
Bauxite miner K enters into a contract with Supplier L
the asset is not working properly or being
maintained – i.e. a ‘warranty-type’ obligation,
for the rental of 10 100T trucks for 5 years. L has a total
or a vehicle requiring maintenance, is not fleet of 60 100T trucks, the remainder of which are
considered to be a substantive substitution located either at either L’s depot or other customers’
right. (IFRS 16.B18) sites which are more than 1000km from K’s mine site.
L has a right to substitute trucks throughout the period
of the contract.
K does not know the availability of the L’s alternative
trucks throughout the period of use, and the alternative
trucks are located more than 1000km from K’s site,
therefore K is unable to conclude that there is a
Observation
practical ability to substitute throughout the period
Replacing a piece of equipment for a different of use.
piece of equipment with different capabilities
would not be assessed to be substitution.
Costs will be incurred by L to substitute trucks,
including transport costs and lost revenue whilst
substituting. K is unable to determine whether the
economic benefit will exceed the costs of substitution,
therefore K presumes that the substitution right is not
substantive and that there is an identified asset
Example 1.1.3.4 – Overhaul of an excavator:

Substitution right is not substantive
A customer enters into a contract for the right to use
an excavator on its mine site for 8 years. After 4 years,
the excavator is expected to require a full overhaul. The
supplier will provide a substitute excavator to service
the remaining 4 years of the contract. In our view,
the supplier’s right to substitute for the purpose of an
overhaul is not a substantive substitution right because
it is akin to repairs and maintenance.

Step 2
Does the customer obtain
substantially all of the
economic benefits?
1.2 Overview
A contract contains a lease only if the customer obtains
substantially all of the economic benefits. Observation
In evaluating whether the customer has
The economic benefits from using an asset include its primary
the right to obtain substantially all of the
output (ie. goods or services), by-products (e.g. renewable
economic benefits from the use of an
energy credits that are generated through use) and other asset, a company considers the economic
economic benefits from using the asset that could be realised benefits that can be derived from the asset
from a commercial transaction with a third party (e.g. sub- within the defined scope of the customer’s
leasing the asset). right to use.
Refer to Section 1.1.2 for a discussion of ‘substantially all’. For example, a mining company leases a
haulage truck that it can operate only within
the state of Western Australia during the
Example 1.2.1 – Solar plant: Customer receives 5-year contract term. When assessing
substantially all of the economic benefits from use whether the mining company has the right
to obtain substantially all of the economic
Zinc miner M enters into a 25-year contract with Power benefits from use of the haulage truck, only
Co N to purchase all of the electricity produced by a the economic benefits for the permitted
new solar plant. N owns the plant and will receive tax location are considered, and not beyond.
credits relating to the construction and ownership of
the plant, and M will receive renewable energy credits
that accrue from use of the plant.
M has the right to obtain substantially all of the
economic benefits from use of the plant over the 25-
year period because it obtains:
–– the electricity produced by the plant over the lease
term – i.e. the primary product from use of the
asset; and
–– the renewable energy credits – i.e. the by-product
from use of the asset.
Although N receives economic benefits from the plant in
the form of income tax credits, these economic benefits
relate to the ownership of the plant. The tax credits do
not relate to the use of the plant and therefore are not
considered in this assessment.

Example 1.2.2 – Solar plant
Amending example 1.2.1:

Zinc miner M obtains the electricity produced by the
plant over the lease term.
Power Co N obtains the renewable energy credits
from use of the asset, and receives economic benefits
from the plant in the form of tax credits relating to
ownership of the plant.
It is not clear whether M does receive all of the economic
benefits from use of the plant. Further analysis would be
required to determine whether M obtains substantially
all of the economic benefits from use of the plant.
Example 1.2.3 – Land easement for railway:

Customer obtains substantially all of the economic
benefits from use
Easements are commonly used in a variety of
industries. A mining company enters into an
arrangement with a landowner (grantor) for an
easement right over the grantor’s farmland to construct
and have exclusive use of a railway. The land on which
the railway is built will be specified either explicitly in the
easement contract with the landowner or will become
specified once made available for the customer’s use.
When assessing whether the customer obtains
substantially all of the economic benefits from use
of the land easement, whether the grantor can
realistically obtain economic benefits from using
the land is considered.
If the grantor cannot use the land over which the
easement is granted for any other purpose, the
customer obtains substantially all of the economic
benefits from use of the land easement.

Step 3
Who has the right to direct the
use of the asset?
1.3 Overview
A contract contains a lease only if the customer directs the use of the asset.
who makes the “how and for what purpose” decisions?
Customer Predetermined Supplier
Contract does
not contain a
lease
A customer has the right to direct the use of an identified asset in either of the
following situations:
–– the customer has the right to direct “how and for what purpose” the asset is used
throughout the period of use; or
–– the relevant decisions about how and for what purpose the asset is used are
predetermined, and:
–– the customer has the right to operate the asset (or to direct others to operate the
asset in a manner that it determines) throughout the period of use, without the
supplier having the right to change those operating instructions; or
–– the customer designed the asset (or specific aspects of the asset) in a way that
predetermines how and for what purpose the asset will be used throughout the
period of use.
Observation
Under IFRIC 4, an arrangement conveyed the right to use an asset if any one of the following three specific criteria are met:
–– the customer has the ability or right to operate the asset, including to direct how others operate the asset, while
obtaining more than an insignificant amount of the output; or
–– the customer has the ability or right to control physical access to the asset while obtaining more than an insignificant
amount of the output; or
–– no other party takes more than an insignificant portion of the output and the unit price of the output is neither fixed nor
at market.
Meeting the above criteria will not necessarily result in a lease being identified under IFRS 16 which requires a more
comprehensive analysis of control, including who makes the “how and for what purpose decisions”.
This is likely to mean that some agreements that are currently treated as leases may fall outside the new lease definition.
For example, under some power purchase agreements, a customer may obtain all of the output from the plant and pay a
price that is not fixed or market price, such as plant operating costs plus a margin. Such an arrangement may have been
identified as a lease applying the requirements of IFRIC 4, however applying IFRS 16, the way in which output is priced is
not a relevant consideration but the assessment rather focusses on whether the customer controls the asset.

“How and for what purpose” decisions

A company considers the decision-making rights that are most relevant to
changing how and for what purpose the asset is used – ‘relevant’ in the
sense that they affect the economic benefits derived from use.
Examples of relevant decisions that, depending on the circumstances, grant
the right to change how and for what purpose the asset is used include the
following:
–– What: Rights to change the type of output that is produced by the asset
(e.g. deciding whether to use a shipping container to transport goods or
for storage).
–– When: Rights to change when the output is produced (e.g. deciding
when a power plant will be used by issuing instructions of when
electricity is required).
–– Where: Rights to change where the output is produced (e.g. deciding on
the destination of a truck or a ship).
–– Whether and how much: Rights to change whether the output is produced,
and the quantity of that output (e.g. deciding whether to produce energy
from a power plant and how much energy).
Determining who makes the “how and for what purpose” decisions
In assessing whether a customer has the right to direct the use of an asset,
a company considers only the rights to make decisions about the asset’s use
during the period of use. Decisions that are predetermined before the period
of use – i.e. commencement date – are not considered.
Examples of decision-making rights that do not grant the right to change
how and for what purpose the asset is used include rights that are limited to
operating an asset based on the decisions about how and for what purpose
the asset is used, or maintaining an asset.
A contract may include certain terms and conditions designed to protect
the supplier’s interest in the identified asset or other assets, to protect its
personnel or to ensure the supplier’s compliance with laws or regulations.
Such protective rights typically define the scope of the customer’s right to
use an asset but do not, in isolation, prevent the customer from having the
right to direct the use of the asset within that scope.
Example 1.3.1 – Cargo ship: Customer makes the “how and for
what purpose” decisions
Customer P enters into a five-year contract with Supplier Q, a ship
owner, for the use of an identified ship. P decides whether and what
cargo will be transported, and when and to which ports the ship will
sail throughout the period of use, subject to restrictions specified in the
contract. These restrictions prevent P from sailing the ship into waters at
a high risk of piracy or carrying explosive materials as cargo. Q operates
and maintains the ship, and is responsible for safe passage.
P has the right to direct the use of the ship. The contractual restrictions
are protective rights that do not have the right to change how the
ship is used but protect Q’s investment in the ship and its personnel.
Within the scope of its right of use, P determines how and for what
purpose the ship is used throughout the five-year period because it
decides whether, where and when the ship sails, as well as deciding
the cargo that it will transport. Q does not have the right to change
these decisions throughout the period of use.

Example 1.3.2 – Construction contract: Customer does

not make the “how and for what purpose” decisions
Mining Co R enters into a contract with Construction Co Question: What if the customer and the
S to construct a processing plant designed by R on R’s supplier each make some of the “how
property. The project is expected to take 15----20 months and for what purpose” decisions?
to complete. Judgment is required to assess the individual
significance of the different how and for
The nature of the construction services is such that S will
what purpose decisions i.e. their impact on
use a variety of construction equipment it owns to fulfill the economic benefits. If some decisions
the contract. During the construction period, the various have greater significance than others, then
pieces of equipment are implicitly specified because the party that makes the more significant
S will not, under circumstances likely to occur or exist decisions generally directs the right to use
throughout the period of use, economically benefit from the asset.
substituting the equipment it commits to the project for
equivalent equipment during the construction period (the
period of use). Therefore, the pieces of equipment are
identified assets.
While the pieces of equipment are identified assets, and
implicitly specified to R’s construction project, R does
not control their use. At no point during the period of use
does R have the right to direct how and for what purpose
any of the identified equipment is used. S makes the
decision around how to construct and accordingly what
and how to use various individual assets. While R has
specified an output from the use of the equipment as a
unit (the constructed processing plant), R has no rights to
decide how S employs any individual piece of equipment
to fulfill the construction contract. Rather, it is S that,
throughout the period of use, will solely decide how each
piece of equipment is used to complete the numerous
tasks necessary to fulfill the contract.
Example 1.3.3 – Mine camp contract: Customer

makes the “how and for what purpose” decisions
Remote Miner T enters into a 4 year contract with Supplier
U for the use of mine camp accommodation units. The
units to be used are explicitly specified in the contract and
cannot be substituted. U is responsible for maintenance
of the units. Compensation is based on occupancy rates.
T will have exclusive use of the accommodation units
throughout the 4 year contract.
T can make the following decisions:
–– where the accommodation units will situated on the
mine site;
–– when and whether the units are occupied.
What the units are to be used for i.e. for accommodation
purposes, is predetermined by the contract.
In this example, T can change where the units are
situated, when, whether and how much the units are
used, therefore makes the how and for what purpose
decisions throughout the period of use and therefore
directs the use.

Example 1.3.4 – Shipping contract: “How and for

what purposes” decisions are predetermined
Question: What if only some of the “how
Coal miner T enters into a four-year contract with
and for what purpose” decisions are
predetermined?
Shipping Co U, a shipping company, to transport coal
from Australia to China. The ship to be used is explicitly
If some but not all of the relevant decisions specified in the contract and cannot be substituted. T’s
about how and for what purpose the cargo will occupy substantially all of the capacity of the
asset is used are predetermined, then the ship. The contract specifies the cargo to be transported
assessment includes only those relevant
and dates of pickup and delivery. T hires the captain;
decisions that are not predetermined.
the rest of the crew is provided by U.
For example, Mining Co V enters into a
contract with Pipeline Operator W to obtain In this example, all of the decisions about how and
exclusive use of W’s water pipeline for a for what purpose the asset is used are predetermined
period of 25 years. In this case, the decisions because the contract specifies when and where the
over what is transported (i.e. water) and ship sails, as well as the cargo to be transported.
where it is transported (from the beginning to The ship was not designed by T, but T may operate
the end of the pipeline) are predetermined, the ship because the ship’s captain is hired by T.
Therefore, the analysis will focus on Although the ship cannot be operated without the
determining whether the supplier or the rest of the crew (which is provided by U), it is usually
customer has the right to make the relevant the captain who makes the (major) operational
decisions that are not predetermined – i.e. decisions and gives instructions. In this scenario, it
whether, when and how much water is is likely that T operates the ship and consequently
transported through the pipeline. has the right to direct its use.
Have I thought of everything?

It may take a substantial effort to identify all lease agreements and extract all relevant lease data.
This is not an exhaustive list however to aid your implementation process, we highlight some arrangements
which are common for mining companies to be party to and which may contain leases below.
Arrangements to consider:
Shipping Mining services contracts Camp / accommodation contracts
Port access Rail usage Power purchase contracts
Land easements Equipment hire Trucking and haulage contracts

Leases, refer to related KPMG resources on page 47.

2 Lease and non-lease components

Companies often enter into arrangements for services,
which may include a right to use assets. If a contract is,
or contains a lease, then the company accounts for each Observation
separate lease component, separately from non-lease
components e.g services. Charges for administrative tasks or other
costs incurred associated with the lease
A company considers the right to use an underlying asset as that do not transfer a good or service to
a separate lease component if it meets the following criteria: the lessee do not give rise to a separate
component. However, they are part of the
–– the lessee can benefit from using that underlying asset total consideration that a company allocates
either on its own or together with other resources that to the identified components.
are readily available; and
–– the asset is neither highly dependent on, nor highly
inter-related with, the other assets in the contract.
If a contract contains a lease component and one or more
additional lease and non-lease components, then the
lessee allocates the consideration in the contract to each Question: What if an observable stand-
component on the basis of: alone price is not readily available?
–– the relative stand-alone price of each lease component; A lessee estimates the stand-alone price of
and the components by maximising the use of
observable information. A lessor however
–– the aggregate stand-alone price of the non-lease allocates consideration in accordance with
components. the requirements of IFRS 15 Revenue from
Contracts with customers.

Example 2.1 – Equipment and maintenance services contract: Lease and non-
lease components
Lessee V enters into a five-year lease contract with Lessor W to use conveyor
equipment. The contract includes W operating the conveyor. W obtains its own
insurance for the conveyor equipment. Annual payments are $2,000 ($300 relate to
operating and $50 to insurance costs). V is able to determine that similar operating
services and insurance costs are offered by third parties for $400 and $50 respectively
per year. V is unable to find an observable stand-alone rental amount for similar mining
equipment because none are typically leased without related operating services
provided by the lessor.
In this case:
–– the observable stand-alone price for operating services is $400;
–– the estimated stand-alone price of the conveyor is $1,750;
–– the insurance cost does not transfer a good or service to the lessee and therefore is
not a separate component.
Components Stand-alone price Selling price ratio Price allocation
Lease 1,750 81% 1,628 (2,000x81%)
Operating services 400 19% 372 (2,000x19%)
Insurance - - -
Total 2,150 2,000
$1,628 is allocated to the lease component and $372 to the non-lease

(service) component.
Practical expedient
A lessee can elect, by class of underlying asset,
not to separate lease components from any
associated non-lease components. A lessee
that takes this election accounts for the lease
component and the associated non-lease
components as a single lease component.
Unless a lessee applies the practical expedient, it
accounts for non-lease components in accordance
with other applicable standards.
Applying the practical expedient to example 2.1,
lessee V would combine the lease and non-lease
(service) components and account for them as a
single lease component of $2,000 ($1,628 plus
$372). This will result in the recognition of a higher
lease liability and right-of-use asset, and therefore
higher interest and depreciation, impacting
financial metrics such as EBITDA.


Leasing overview

Significant judgement may be required

to determine the inputs into the lease
liability and right of use asset, including:
• Which payments are included within
the lease liability?
• What discount rate should be used
to discount the lease payments?
• What is the lease term where the
right to use an asset is not for a
fixed term?
These questions will be relevant for all
leases, and are especially relevant for
service arrangements containing leases
such as mining services contracts.

3 Lessee accounting
The new standard eliminates the current operating/finance lease dual accounting model
for lessees. Instead, there is a single, on-balance sheet accounting model, similar to
current finance lease accounting.
Balance sheet Profit or loss - Lease expense

Asset = Right-of-use of underlying asset Depreciation + Interest = Front-loaded total
Liability = Obligation to make lease lease expense
payments
Initial measurement of the lease liability

At the commencement date, a lessee measures the lease liability at the present value of
the future lease payments.
Present value of
Present value of
Lease liability = lease payments + expected payments
at end of lease
The lease term, lease payments and discount rate are key inputs in the calculation of the
lease liability and may require significant judgement to determine.
Non-cancellable period of the lease, together with optional renewable periods

Lease term if the lessee is reasonably certain to extend, and periods after an optional
termination date if the lessee is reasonably certain not to terminate early.
–– Fixed payments (including any in-substance fixed payments) less any lease
incentives receivables;
–– Variable lease payments that depend on an index or a rate;
Lease –– Amounts expected to be payable by the lessee under residual value
payments guarantees;
–– The exercise price of a purchase option that the lessee is reasonably certain
to exercise; and
–– Payments for terminating the lease if the lease term reflects early termination.
Interest rate implicit in the lease if this can be readily determined. Otherwise,
Discount rate
the lessee uses its incremental borrowing rate.
Question: If the contract price is fully variable based on usage, does this mean there
will be no lease liability and right-of-use asset to recognise?
Yes. Only variable lease payments that depend on an index or a rate are included in
the lease liability and recognised on balance sheet. It is however relevant to consider
whether there are in-substance fixed payments (those which are in substance
unavoidable) included within the variable payment arrangement. For example, where
there is a contractual minimum lease rental payable this would be an in-substance fixed
payment which is included in the lease liability.

Example 3.1 – Equipment contract: Lease term

Observation
Modifying example 2.1, assume that the contract has
There are significant judgements required no fixed term and lessee V has an option to terminate
in calculating the lease liability: or renew the contract annually. V uses the conveyor
–– a company has to consider lease term,
equipment to transport coal from the processing plant
lease payments and discount rate; and to the warehouse at the port and has a contract to
sell coal and a mine life of 5 years. In this case, the
–– a company also has the option to apply ability of V to meet the meet the requirements of
the practical expedient not to separate
the contract are dependent on the use of conveyor
and apply lease accounting for the entire
equipment and it appears that the customer is
contract for arrangements that contain
lease and non-lease components. reasonably certain to renew the contract annually
for the duration of the sale contract and mine life.
Therefore the lease term is 5 years.
Initial measurement of the right-of-use (ROU) asset

At the commencement date, a lessee measures the right-of-
use asset at a cost that includes the following:
Initial Prepaid
Lease
liability + direct + lease
costs payments
Right-of-use
asset =
Estimated costs to Lease
dismantle, remove + incentives
or restore* received
* Measured in accordance with IAS 37 Provisions,

Contingent Liabilities and Contingent Assets

A lessee’s initial direct costs are the incremental costs of obtaining a lease that would
otherwise not have been incurred.
Subsequent measurement of the lease liability
After initial recognition, the lease liability is measured at amortised cost using the
effective interest method.
When there is a change in the factors listed below, a lessee remeasures the lease liability
using the discount rate indicated:
–– Expected amount payable on the residual value guarantee

Unchanged discount
–– Index or rates (other than floating interest rates)
rate
–– In-substance fixed payments
–– Lease term
–– Floating interest rates Revised discount rate
–– Assessment of purchase options
Subsequent measurement of the Right-of-use asset

Generally, right-of-use assets are depreciated and are subject to impairment testing in
accordance with IAS 36 Impairment of non-financial assets.
If the ROU asset meets the definition of investment property, the ROU asset is measured
in accordance with its accounting policy for other investment properties, which may be at
fair value.
If the ROU asset relates to a class of property, plant and equipment that are revalued
under IAS 16 Property, plant and equipment, then it may apply the revaluation model
to all ROU assets that belong to the same class.
Observation
It is common for mining companies to

recognise provisions for restoration under
IAS 37. Where restoration relates to a
leased asset e.g. decommissioning of a
power plant, the rehabilitation asset will
be included in the ROU asset. This may
result in a change in the balance sheet
classification of the restoration asset.


4 Lessor accounting
Lessor accounting under IFRS 16 remains similar to current
requirements under IAS 17. A lessor continues to apply the
“dual accounting model”, and classifies a lease as either a
Observation
finance lease or an operating lease, as follows:
A key consequence of the decision to –– leases that transfer substantially all of the risks and
retain the IAS 17 dual accounting model rewards incidental to ownership of the underlying asset
for lessors is a lack of consistency with the
are finance leases; and
new lessee accounting model.
This can be seen where a lessor classifies a
–– all other leases are operating leases.
lease as an operating lease: Similar to lessees, there may be arrangements accounted for
–– the lessee applies the right-to-use model as leases under IAS 17 and IFRIC 4 which would not be leases
and recognises a right-of-use asset and applying the new definition in IFRS 16, and arrangements
a liability for its obligation to make lease which are currently accounted for only as service contracts
payments; whereas may be treated as containing leases.
–– the lessor continues to recognise the For lessors, whilst the contracts which contain leases
underlying asset and does not recognise may change as a consequence of the new lease definition,
a financial asset for its right to receive consistent with the finance lease and operating lease
lease payments. accounting models in IAS 17:
–– for operating leases, the underlying asset will continue
to be recognised on the lessor’s balance sheet
–– finance leases result in the underlying asset being
derecognised and a finance lease receivable recognised.
Question: Are there any changes to lease Initial measurement of the finance lease receivable
accounting for lessors under IFRS 16? A lessor initially measures a finance lease receivable at
Yes. Whilst the lease classification test is the present value of the future lease payments plus any
essentially unchanged from IAS 17, there unguaranteed residual value accruing to the lessor. The lessor
are a number of changes in the details of discounts these amounts using the rate implicit in the lease.
lessor accounting, for example, lessors
apply the new definition of a lease. There A lessor includes fixed payments (including in-substance fixed
are also changes to sale-and-leaseback, payments), less lease incentives payable, variable payments
sub-lease, lease modification and disclosure that depend on an index or rate, residual value guarantees
requirements. provided to the lessor at the guaranteed amount, the exercise
price of purchase options if the lessee is reasonably certain
to exercise; and termination penalties payable in accordance
with the expected lease term.
The lease classification test is essentially unchanged from
IAS 17. This is illustrated below.

IAS 17 and IFRIC 4 IFRS 16

Lease identification Balance sheet Lease identification Balance sheet
Finance lease:
If a lease exists, a
derecognise
lessor would classify
Finance lease: underlying asset and
the lease as a finance
derecognise recognise finance
lease
underlying asset and lease receivable
recognise finance
lease receivable No change to
Lease exists – lessor If no lease exists recognition of
classifies the lease underlying asset
as either a finance or
operating lease If a lease exists, a
Operating lease:
lessor would classify
continue to recognise
Operating lease: the lease as an
underlying asset
continue to recognise operating lease
underlying asset
No change to
If no lease exists recognition of
underlying asset
No change to
If no lease exists recognition of
underlying asset
No change to
No lease exists recognition of If a lease exists, a
underlying asset lessor would classify Account for the lease
the lease either as a as either operating or
finance or operating finance as above
lease
Example 4.1 – Mining services contract: Lease exists applying existing and new lease
definitions, lease is classified as a finance lease in both cases
A contractor enters into a lease with a mining company over a fleet of 10 trucks to be used
in the customer’s mining operation. The contract provides a put option over the equipment at
the contractor’s (lessor’s) option that the contractor may exercise, requiring the customer to
purchase the mining equipment for a predetermined amount. The arrangement is assessed to
contain a lease under both IAS 17 and IFRS 16. The lease is accounted for as a finance lease
as substantially all of the risks and rewards of ownership are transferred to the lessee.


Other considerations
The impact of IFRS 16 will not be limited

to accounting for leases.
Other areas that companies need to
consider during the transition process
include:
• joint arrangements
• other financial reporting
considerations
• transition method.

5 Joint arrangements
It is common for mining companies to be a party to a joint
arrangement (i.e. a joint venture or a joint operation).
Identifying the customer when a joint arrangement is Observation
involved is critical in determining whether there is a lease.
A joint arrangement is considered to be the customer when In practice, questions may arise about
the contract is either entered into by the joint arrangement whether a joint operator enters a contract
as a principal in its own name or on behalf
itself, or signed by one or more of the parties to the joint
of the joint operation. Judgement applies
arrangement on behalf of the joint arrangement. and the individual facts and circumstances
When the joint arrangement is the customer, the contract – including the legal environment – should
contains a lease if the parties to the joint arrangement be considered.
collectively have the right to control the use of an identified
asset throughout the period of use through their joint
control of the arrangement.
If there is a lease, then:
–– in the case of a joint operation, each party to the joint
operation accounts in its own financial statements for its
share of the right-of-use asset and its share of the lease
liability; and
–– in the case of a joint venture, the right-of-use asset
and the lease liability are recognised in the financial
statements of the joint venture and not in the financial
statements of the individual venturers.


6 Other financial reporting
considerations
There are a number of other areas of financial reporting which are
impacted by lease accounting. On transition, companies need to
consider the wider impact of IFRS 16, the following areas may
require amendment on transition:
–– Inventory costing and deferred stripping assets accounting
policies – IAS 2 Inventories requires the cost of inventory to
include costs of conversion and other costs incurred in bringing
the inventories to their present condition. IFRIC 20 Stripping Costs
in the Production Phase of a Surface Mine requires the cost of
the stripping asset to include costs directly incurred to perform
the stripping activity. It is common for the depreciation of assets
under finance lease and operating lease rentals under IAS 17 to be
capitalised to the cost of inventory where they are costs directly
related to the units of production and to deferred stripping assets.
Similarly, under IFRS 16, depreciation of ROU assets and lease
payments may be capitalised to the cost of inventory and deferred
stripping assets where they meet the criteria for capitalisation in
line with accounting standards. For example, IAS 23 Borrowing
costs may include the interest in respect of lease liabilities under
IFRS 16, these costs may only be capitalised where the criteria
under IAS 23 are met.
–– Business combination accounting – Where the acquiree is a
lessee, under IFRS 3 Business Combinations the acquirer shall
measure the lease liability at the present value of remaining
lease payments as if the acquired lease were a new lease at
the acquisition date, using the discount rate at acquisition date.
The acquirer shall measure the ROU asset at the same amount
as the lease liability.
–– Impairment assessment process – Operating lease payments may
previously have been included when calculating the recoverable
amount for a CGU using a discounted cash flow model. Similar to
finance lease liabilities under IAS 17, lease liabilities under IFRS
16 are financing liabilities, therefore cash flows associated with
on balance sheet leases should be excluded from the cash flow
model where lease liabilities are excluded from the carrying value,
but ROU assets are included in the carrying value.
–– Cash flow statement presentation – Under IAS 17, operating lease
payments are presented within operating cash flows. Under
IFRS 16, lessees will recognise leases in the income statement
as depreciation of ROU assets and interest in respect of lease
liabilities. In the cash flow statement:
–– depreciation and interest will be presented within operating
cash flows
–– payments reducing the lease liability are presented within
financing cash flows.
34
34
7 Transition method
A key next step is to evaluate which transition method
to apply. There are different options available, including
fully retrospective or modified retrospective and a host
Observation
of different practical expedients. Many of the options and
expedients can be elected independently of each other. Deciding whether or not to apply the
practical expedient to ‘grandfather’ the
Most of the choices you have to make on transition involve lease definition on transition is crucial, as
a trade-off between cost and comparability. That is, the it impacts the scope and nature of work
options and expedients that simplify and reduce the costs of to be completed. For mining companies,
transition tend to reduce the comparability of your financial some contracts currently accounted for
information. Choosing the best transition option for your as leases may not be leases under IFRS
business will require thought – and probably some detailed 16 (refer section 1.3), and some contracts
modelling of alternative approaches. not currently leases may become leases
applying the requirements of IFRS 16 (refer
Except for sub-leases and sale-and-leaseback transactions, a section 1.1.3).
lessor is not required to make any adjustments on transition.
Instead, a lessor accounts for its leases in accordance with
IFRS 16 from the date of transition.
The practical expedient to grandfather the definition of a lease
on transition offers considerable relief on transition. Without
this relief, companies would be required to reassess all of
their previous decisions about which existing contracts do
and do not contain leases. The practical expedient is therefore
likely to prove popular, however companies will need to
assess all contracts which commence before the date of initial
application applying the requirements of IAS 17 and IFRIC 4.


Case study

Case study
Mining Services contract

Mining services contracts range from equipment hire, to full
scale management of mining operations. Where contracts
include the use of equipment, companies will need to assess
whether the contract is, or contains a lease or multiple leases.
Whether the customer controls the equipment will be a key
judgement in applying the IFRS 16 lease definition.
The facts and circumstances specific to each contract are
required to be considered in identifying whether a contract
contains a lease. The following case study explores some of
the key judgements and decisions in identifying leases in a
mining services contract.
Equipment hire
(dry hire)
Equipment hire
Equipment hire and operators,
and operators contractor mine
(wet hire) management, and
owner operated
mine site Equipment hire and
operators, contractor
managed and
operated mine site

Scenario background
An iron ore miner (miner) enters into a 5 year contract with a mining contractor
(contractor) to complete truck and shovel mining of specific blocks at the miner’s
site. The contract does not list the equipment to be used.
The contractor is responsible for providing a fleet of equipment and operators
suitable to meet the requirements of the miner’s mine plan. The equipment
required will vary throughout the contract as the requirements of the mine plan
change. The contractor can remove equipment from site and bring additional
items of equipment to site as long as continuous delivery of product to the
crusher is uninterrupted.
All equipment will be located at the miner’s site throughout the period of
use. Significant maintenance may require equipment to be removed from
site and substituted.
Whilst on the miner’s site, equipment will be exclusively used for the truck and
shovel mining operations. The miner determines the Life of Mine Plan (LOMP),
the 1 year, 3 month rolling and 1 month mine plan and supervises the day-to-
day operations, including how each asset will be employed to comply with the
mine plan.
The equipment supplied will include multiple excavators and haulage trucks.
Decisions affecting the equipment’s use include:
–– where each excavator is employed in the pit
–– where each truck will haul material from and to
–– what type of material an excavator will dig, and a truck will haul
–– whether, when and how much each excavator and truck is used.
The mine plan is continually revised by the miner over the course of the
mine’s life.

Case study
1 Lease definition
For the purposes of this case study, the assets made available for use by the contractor
comprise trucks and shovels (excavators).
Is there an identified asset? No

Step 1 –– Specified asset (Section 1.1.1)
–– Capacity (Section (1.1.2)
–– Substantive supplier substitution right (Section 1.1.3)
Yes
Step 2 Does the miner obtain substantially all of the economic No
benefits? (Section 1.2)

Control over the use of
Yes
the identified assets
Step 3 who makes the “how and for what purpose” decisions?
Miner Predetermined Contractor
Contract does
not contain a
lease

Case study
Step 1
Lease definition assessment Observation
Is there a specified asset? –– An asset does not need to be specified at contract
inception, but can be specified at the time it is made
–– Whilst specific items of equipment are not listed in
available for use (Section 1.1.1).
the contract, it appears that the contract is dependent
on the use of specific equipment. Each item of –– When a contract depends on the use of a specific
equipment becomes a specified asset once made asset, once an asset is made available for use, it
available for use. becomes specified (Section 1.1.1).
Does the contractor have substantive –– Where assets are located at the miner’s site, it is likely
substitution rights? that the costs associated with substitution will exceed
the benefit from substitution (Section 1.1.3).
–– In this case, the miner cannot prevent the contractor
from substituting equipment, however the miner does –– The right to substitute for repairs and maintenance
not know that: is not considered in assessing whether there is a
substantive right to substitute (Section 1.1.3).
–– it will be practical e.g. whether alternative assets
will be available throughout the period of use; nor –– Unless the miner is able to readily determine that
whether there is a practical ability to substitute and the
benefits from substitution will outweigh the costs,
–– it will be economically beneficial, the equipment
the contractor’s substitution right is not substantive
are located at the miner’s site, and costs will be
(Section 1.1.3).
incurred by the contractor to substitute.
–– A right to substitute for repairs or maintenance is
not considered.
–– Based on the facts and circumstances available,
the miner is not able to readily determine that the
contractors’s substitution right is substantive.
The equipment made available for use by the contractor are identified assets.
Step 2
Does the miner obtain substantially all of the economic benefits?
–– Throughout the period of use, the equipment will be –– Where a miner has exclusive use of the assets,
used exclusively to perform the scope of works under assessing whether the miner obtains substantially
the contract and are not permitted to be used for any all of the economic benefit will be straight forward
other purpose. (Section 1.2).
The miner obtains substantially all of the economic benefits from use of the assets.

Case study
Step 3
Who has the right to direct the use of the asset?
Based on the facts and circumstances specific to this A miner needs to have the right to make the most relevant
scenario, it appears that the decisions which are made decisions during the period of use in order to direct
during the period an asset is used include: the use of the asset, unless the relevant decisions are
predetermined and the miner either operates or designed
–– where each excavator is employed in the pit
the asset (section 1.3).
–– where each truck will haul material from and to
Examples of relevant decisions that, depending on the
–– what each excavator will dig and truck will haul circumstances, grant the right to change how and for
what purpose the asset is used include the following:
–– when, whether, and how much each excavator and
truck is used. –– What: Rights to change the type of output that is
produced by the asset
The miner sets the mine plans, effectively providing
instructions which determine the quantity and timing of –– When: Rights to change when the output is produced
delivery of the output. In addition, the daily operations
–– Where: Rights to change where the output is produced
of the mine are supervised by the miner and each of
the above decisions are made by the miner. –– Whether and how much: Rights to change whether
the output is produced, and the quantity of that output
Therefore the miner has the right to determine where,
(section 1.3).
when, whether and how much output the equipment
will produce throughout the period of use.
The contractor, in contrast, has no rights to decide (or
change), or prevent the miner from changing how the
excavators and trucks are used. The contractor has no
right to change where, whether or when, or how an
identified asset will be used.
In this case, it appears that the most relevant decisions are made by the miner and the miner directs the use of the identified assets,
being the trucks and excavators.
Observation
The conclusion that a lease exists over the trucks and excavators under the contract in the case study is based on the specific
facts and circumstances of the scenario presented.
Mining services arrangements vary from contract to contract in how they operate and the decisions which the miner and
contractor each have the right to make. Identifying whether an arrangement contains a lease, or multiple leases, may be a
significant area of judgment and will depend on the specific facts and circumstances of the arrangement. The conclusions
reached may be different for each contract.
Some of the areas in the lease identification assessment which may require careful consideration include:
1. Whether the contractor has a substantive substitution right (Section 1.1.3)
–– The assessment of whether it is practical and economically beneficial for the contractor to substitute an asset throughout
the period of use is performed by the miner from the contractor’s perspective. The miner may not have access to sufficient
information to determine whether the contractor’s substitution right is substantive. If the miner is not able to readily
determine whether the contractor has a substantive substitution right, the miner shall presume that the substitution right is
not substantive.
2. Who directs the use of the asset or asset (Section 1.3)
–– There may be multiple decision-making rights which can change how and for what purpose an asset is used.
Under some arrangements, both the miner and contractor may be granted these decision-making rights. Significant
judgment may be required in these types of scenarios, including careful consideration of which decisions each party
controls and which of those decisions are most relevant – i.e. most significantly affect the economic benefits that can
be derived from use of the asset.

Case study
2 Lease and non-lease components

A mix of equipment is required to fulfil the contract, including trucks and excavators. It is concluded that the lease
of each truck and excavator are each separate lease components, this is because:
–– the miner can benefit from use of each of the pieces of equipment on their own
–– although the miner is leasing all pieces of equipment for one purpose (i.e. to engage in mining activities), the
equipment can be used independently of other items.
In addition to the lease of equipment, the contract includes a fixed labour component. The wage component of
the contract relates to services, that is a non-lease component.
As a practical expedient, the lessee can elect to apply lease accounting to the entire contract.
Contract price: A fixed annual amount of $1,000,000 relating to wage costs is payable annually, plus a
variable amount relating to the equipment payable based on tonnes mined, expected to be approximately
$1,500,000 per annum. Initial direct costs, comprising legal costs associated with the origination of the
lease agreement total $15,000.
3 Lessee accounting
Initial recognition
Lease liability
Given the payments for use of the leased assets are fully variable and would not be included in the lease liability, for
the purposes of illustrating lease accounting applying the requirements of IFRS 16, the remainder of this example
assumes the practical expedient is applied.
Payments for equipment rental are fully variable, payable based on tonnes mined. Variable lease payments which
are not linked to an index or rate are not allocated to the lease liability and there is no lease liability to recognise on
balance sheet.
Only in the event the lessee applies the practical expedient to not separate lease and non-lease components would
a lease liability be recognised. Assuming this practical expedient is applied, payments for non-lease component
($5,000,000 = $1,000,000 x 5 years) would be included within the lease liability. Using a discount rate of 5%, the
lease liability is calculated as $4,329,477. If the practical expedient is not applied, the lease liability would be nil.
ROU asset
The total of the lease liability of $4,329,477 and initial direct costs of $15,000 equals $4,344,477, being the ROU asset
at initial recognition
Observation
Lessees can choose either to present ROU

assets separately from other assets on
the face of the balance sheet or within the
same line item as that within which the
corresponding asset would be presented if
they were owned.
Case study
Presentation
The impact on the balance sheet, income statement and EBITDA throughout the lease are illustrated below.
IFRS 16 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Total
Lease liability 4,329,477 3,545,951 2,723,248 1,859,410 952,381
Right of use asset 4,344,477 3,475,581 2,606,686 1,737,791 868,895
Operating expense
1,500,000 1,500,000 1,500,000 1,500,000 1,500,000 7,500,000
(variable)*
Depreciation 868,895 868,895 868,895 868,895 868,895 4,344,477
Interest expense 216,474 177,298 136,162 92,971 47,619 670,523
Net PBT impact 2,585,369 2,546,193 2,505,058 2,461,866 2,416,514 12,515,000
EBITDA impact 1,500,000 1,500,000 1,500,000 1,500,000 1,500,000 7,500,000
Assumptions:
* Variable lease payments are $1,500,000 per annum.
IFRS 16 vs IAS 17
Under IAS 17, operating leases are accounted for as operating expenses on a straight-line basis. Amortisation
of the lease liability and depreciation of the ROU asset under IFRS 16 will result in the front loading of lease
related expenses in the income statement.
The table below illustrates how the mining services arrangement may have been accounted for under
applying the requirements of IAS 17.
IAS 17 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Total
Lease liability - - - - - -
Right of use asset - - - - - -
Operating expense
2,515,000 2,500,000 2,500,000 2,500,000 2,500,000 12,515,000
(variable)*
Depreciation - - - - - -
Interest expense - - - - - -
Net PBT impact 2,515,000 2,500,000 2,500,000 2,500,000 2,500,000 12,515,000
EBITDA impact 2,515,000 2,500,000 2,500,000 2,500,000 2,500,000 12,515,000
Assumptions:
The lease of equipment was either an operating lease or services contract applying the requirements of IAS 17/
IFRIC 4 (the accounting aligned in either case) and services were accounted for on accruals basis.
* Variable lease payments are $1,500,000 per annum.
Similarly, the presentation of the cash flow statement will change upon transition to IFRS 16. Operating lease
expenses were previously included within cash flows from operating activities, and lease payments under
IFRS 16 are classified as a cash flow from financing activities.

Next steps and
other resources

Next steps and other resources
What are the key steps in preparing for

transition to IFRS 16?
Step 1
Preparation
Team: Identify the working group that will lead the project, considering both the finance
team, and contracts management / procurement and operational teams
Timing: Allow sufficient time to collate data/contracts, interpret, consult and develop
solutions
Impact assessment: Plan an assessment to identify the potential impact of IFRS 16, set the
scope of the contracts to review, allocate tasks and engage with appropriate stakeholders
Step 2
Contracts
Catalogue your contracts: Current lease schedule is the ideal starting point as it will
document what you already know. Importantly due to the revised definition of what
may constitute a lease, its important to review other contracts that may include a lease
Assess which contracts contain leases under IFRS 16: Once you have a full register
of contracts set a scope and review those that may contain leases
Step 3
Accounting impacts
Select transition method: Key decisions include whether to grandfather and practical
expedients
Calculate lease accounting entries: Develop or update company lease calculation model,
or consider software solution for more complex lease portfolios, calculate discount rates,
consider lease term and options to extend
Metrics: Calculate estimated impacts on key internal (management KPIs) and external
metrics (bank covenants), including those impacted by operating costs, depreciation,
finance cost. Engage with key stakeholders that may be impacted early
Policies and disclosures: Update accounting policies and note disclosures in financial
statements
Step 4
Business as usual
Future contract negotiations: Ensure that all the relevant business stakeholders
understand the key elements of IFRS 16 so that future contracts are structured in
appropriate manner to meet business needs and accounting implications are known
Month end processes: Update internal processes to record contracts, calculate lease
liabilities and right of use assets, update financial statement disclosures templates and
KPI calculations

KPMG Tips & Project Tools
A KPMG training session tailored to your

business and staff needs can provide an efficient
and valuable opportunity to up-skill your team and
reduce disruption.
KPMG’s impact assessment checklist is a straight

forward resource that allows you to kick start your
project efficiently and focus on key risks.
KPMG’s embedded lease contract review

checklist is a tool that can guide you through key
contract terms to consider that may indicate an
embedded lease where assets are used to deliver
a service
Model out the impact of the new standard on key
metrics, including liabilities, assets and profit to assist
in communication of impact internally and externally

Other KPMG resources

We have a suite of publications to support you in the move to IFRS 16 Leases.
Detailed information on practical application issues associated with the new standard
is contained within the following publications:
Technical accounting publications:
First impressions Lease Definition Leases Transition

Optons
Leases Discount rates Lease payments Variable lease payments

that depend on an index
or a rate
Other resources:
On demand technical
accounting webinars
KPMG Global Mining
Institute: Our hub for mining
industry insights and global
Illustrative disclosures contacts
supplement

Contact us
If you would like to discuss any of the content of this publication, please get in
touch with any of us below or your local KPMG contact.
KPMG Australia Mining contacts:
Western Australia Victoria Queensland

Denise McComish James Dent Jason Adams
National Mining Leader Partner Partner
T: +61 8 9263 7183 T: +61 3 9838 4560 T: +61 7 3233 9642
E: [email protected] E: [email protected] E: [email protected]
Rob Gambitta Glenn Austin Simon Crane

Partner Director Partner
T: +61 8 9263 7451 T: +61 3 9838 4107 T: +61 7 3233 3153
E: [email protected] E: [email protected] E: [email protected]
Glenn Diedrich
Senior Manager New South Wales
T: +61 8 9278 2032
E: [email protected] Daniel Camilleri
Partner
Hayley Pang T: +61 2 9335 8101
Manager E: [email protected]
T: +61 8 9263 4818
E: [email protected]
KPMG.com.au
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influence a person in making a decision, including, if applicable, in relation to any financial product or an interest in a financial product. Although we endeavour to
provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate
in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
To the extent permissible by law, KPMG and its associated entities shall not be liable for any errors, omissions, defects or misrepresentations in the information or for
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February 2018. N16331ARC.

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What is the purpose of this document?

What is the purpose of this document?

What standard is discussed in the document?

What standard is discussed in the document?

IFRS

These publications are focused on topical accounting

KPMG Australia Mining Team

For more information about the requirements of IFRS 16

IFRS for mining | IFRS 16 Leases – Practical application guidance 3

IFRS 16: What do I need to know?

Financial metrics impacted Transition decisions

* Earnings Before Interest, Tax, Depreciation and Amortisation as a non-

Contracts affected by the change may include

Service contracts which Shipping/transport Mining services/

6 IFRS for mining | IFRS 16 Leases – Practical application guidance

Accounting for leases

Current state assessment Evaluation of contracts Transition options Disclosure requirements

KPMG can help

Refer to page 46 for further information about how

IFRS for mining | IFRS 16 Leases – Practical application guidance 7

1.1 Is there an identified asset?.......................................... 12

1.2 Does the customer obtain substantially all

2 Lease and non-lease components...................................... 23

Accounting for leases................................................................. 26

6 Other financial reporting considerations........................... 34

8 Case study – Mining services contract............................... 36

9 Next steps and other resources.......................................... 44

Companies should not underestimate the

10 IFRS for mining | IFRS 16 Leases – Practical application guidance

Is there an identified asset?

Step 2 Does the customer obtain substantially all of the No

economic benefits? (Section 1.2)

Customer Predetermined Supplier

IFRS 16 has an increased focus on who has

1 Refer to section 4 for further information.

On transition, there are a number of 1.1 Overview

Does the supplier have No

12 IFRS for mining | IFRS 16 Leases – Practical application guidance

Example 1.1.1.1 – Remote site power purchase

Example 1.1.1.2 – Mining equipment contract: Asset

IFRS for mining | IFRS 16 Leases – Practical application guidance 13

1.1.2 Capacity portions

Example 1.1.2.1 – Warehouse storage: Capacity

Example 1.1.2.2 – Warehouse storage: Capacity

14 IFRS for mining | IFRS 16 Leases – Practical application guidance

1.1.3 Substantive supplier substitution rights

IFRS for mining | IFRS 16 Leases – Practical application guidance 15

Example 1.1.3.2 – Underlying asset is significantly

Example 1.1.3.4 – Overhaul of an excavator:

16 IFRS for mining | IFRS 16 Leases – Practical application guidance

IFRS for mining | IFRS 16 Leases – Practical application guidance 17

Example 1.2.2 – Solar plant

Amending example 1.2.1:

Example 1.2.3 – Land easement for railway:

18 IFRS for mining | IFRS 16 Leases – Practical application guidance

Customer Predetermined Supplier

IFRS for mining | IFRS 16 Leases – Practical application guidance 19

“How and for what purpose” decisions

20 IFRS for mining | IFRS 16 Leases – Practical application guidance

1.2 Does the customer obtain substantially all