Leases and licences
Partitioning ownership
Four instances
• Financial lease for less than whole life of the
asset
• Lease on natural land for fixed time at the
end of which landlord resumes economic
ownership
• Lease on sub-soil asset where lessee shares
resource rent from extraction with legal owner
• Radio spectrum/mobile phone licence case
First question
• Can a lease for less than the whole life
of a fixed asset be a financial asset?
• 11 out of 12 responses said yes
• Stress on economic ownership
Three options
• Partition ownership via two distinct
assets, originals and copies, premium
on operating lease
• Use mobile phone licence conventions
• Two financial asset solution
Mobile phone criteria for sale
of asset
• Costs and benefits assumed by
licensee
• Up front payment
• Longer period
• Actual or de facto transferability
• Cancellation by issuer improbable
• Business and international accounting
standards
Criteria for treatment as rent
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Short-term
Non-transferable
Detailed stipulations on use
Lessor has unilateral right to terminate
Payments over life of contract
Treatment as asset
• Licence is an asset separate from
spectrum
• Licence held by lessee
• Spectrum always held by lessor, legal
owner
ISWGNA Dec 2001
• The ISWGNA found that there was the
need for more broad-based work on the
treatment of intangible assets. Eg an
alternative treatment should be
investigated whereby the spectrum is
“sold” for a finite amount of time..
Extend mobile phone
treatment?
• Land
• Extraction
• Spectrum
Two financial asset case
• One loan for amount lessee has to repay over
length of contract
• Leads to interest and principal repayment
every period of contract until no loan
outstanding
• Second loan for NPV of residual value of
asset
• No repayment of principal
• Interest payable but not paid so principal
outstanding increases
Questions to Canberra Group
•
•
•
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Transferable operating lease
Mobile phone solution
Two financial asset solution
Another
For:
Financial lease for less than
whole of asset life?
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•
•
•
10 out of 12 say two asset solution;
4 of 10 would prefer single loan
1 no opinion
1 does not think case arises
Partition mineral deposit
between extractor and owner?
• 8 chose two asset solution
• 1 says if there is profit sharing this is
problematical
• 2 say lessor supplies minerals to lessee
as extracted
• 1 no opinion
Land under a long lease?
• 9 say two asset solution
• 1 says conditional on radio spectrum
same way
• Same says if paid for upfront with
expectation renewal is nominal, treat as
sale
• 2 assume up front payments rare, treat
as rent
Mobile phone?
• 8 say two asset solution
• 2 prefer rent solution
• 1 existing treatment (but would prefer
rent)
• no opinion
Merge loans?
• Can do; exposition clearer with two?
Way forward
• How does AEG react to Canberra
consultation?
• Is this a basis for proceeding?
• Would worked examples help reach
recommendation?
• Can we work towards a solution by end
March?