(paragraphs 61-97)

BC232 IFRS 16 requires an intermediate lessor to account for a head lease and a sublease as two separate contracts, applying both the lessee and lessor accounting requirements. The IASB concluded that this approach is appropriate because in general each contract is negotiated separately, with the counterparty to the sublease being a different entity from the counterparty to the head lease. Accordingly, for an intermediate lessor, the obligations that arise from the head lease are generally not extinguished by the terms and conditions of the sublease.

Classification (paragraph B58)

BC233 The IASB decided that, when classifying a sublease, an intermediate lessor should evaluate the lease by reference to the right-of-use asset arising from the head lease and not by reference to the underlying asset. This is because:

(a) an intermediate lessor (ie the lessor in a sublease) does not own the underlying asset and does not recognise that underlying asset in its balance sheet. In the IASB’s view, the intermediate lessor’s accounting should be based on the asset that the intermediate lessor controls (ie the right-of-use asset) and not the underlying asset that is controlled by the head lessor.