Portfolio application and combination of contracts

Learning objectives

• Determine when contracts entered into at or near the same time with the same counterparty are combined (negotiated as a package, interdependent prices, a single lease component) and when the portfolio approach is permitted.L2, L3

Normative references

• IFRS 16 §B1The standard specifies the accounting for an individual lease; as a practical expedient, however, an entity may apply it to a portfolio of leases with similar characteristics if it reasonably expects that the effects on the financial statements would not differ materially from applying it to the individual leases. It then uses estimates and assumptions that reflect the size and composition of the portfolio.
• IFRS 16 §B2Two or more contracts entered into at or near the same time with the same counterparty (or related parties of the counterparty) are combined and accounted for as a single contract if at least one criterion is met: they are negotiated as a package with an overall commercial objective that cannot be understood without considering them together, the amount of consideration in one contract depends on the price or performance of the other, or the rights to use underlying assets conveyed form a single lease component as described in B32.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

6 questions

• Quarnel holds 300 leases of commercial vehicles with similar characteristics. It is considering applying IFRS 16 at portfolio level rather than contract by contract. On what condition is this practical expedient permitted?L2
• Velmar signs two contracts on the same day with the same supplier. Which of the following situations does not, on its own, require them to be combined?L2
• The accounting department of the Ostreva group is preparing a fact sheet on combining contracts under IFRS 16. Which elements are part of the conditions that require two contracts to be combined? (several answers)L2
• On 1 March 20X1, Gardelle signs two contracts with Imbra: the provision of a specified warehouse for five years and a three-year handling service. The warehouse contract provides for a 15% discount on the consideration as long as the handling contract is not terminated. How should Gardelle account for these contracts?L3
• On 10 June 20X2, Pennec signs with Arlis a contract for specified offices. On 14 June 20X2, it signs with Arlis Services, a subsidiary of Arlis, a contract for the furniture of those offices. The Arlis group negotiated the two contracts together, as an overall fit-out offer whose commercial objective can only be understood by considering them together. What conclusion should be reached?L3
• Thalgo applies IFRS 16 to a portfolio of 1,200 forklift leases with similar characteristics; it reasonably expects an effect that does not differ materially from applying it contract by contract. How does it establish its estimates and assumptions?L3