through rights both to obtain substantially all the economic benefits or service potential from that asset and to direct its use.

The Code expands the scope of IFRS 16 Leases to include arrangements with nil consideration, peppercorn or nominal payments.

Initial measurement

Leases are recognised as right-of-use assets with a corresponding liability at the date from which the leased asset is available for use (or the IFRS 16 transition date, if later). The leases are typically for fixed periods in excess of one year but may have extension options.

The council initially recognises lease liabilities measured at the present value of lease payments, discounting by applying the council's incremental borrowing rate wherever the interest rate implicit in the lease cannot be determined. Lease payments included in the measurement of the lease liability include:

• fixed payments, including in-substance fixed payments
• variable lease payments that depend on an index or rate, initially measured using the prevailing index or rate as at the adoption date
• amounts expected to be payable under a residual value guarantee
• the exercise price under a purchase option that the council is reasonably certain to exercise
• lease payments in an optional renewal period if the council is reasonably certain to exercise an extension option
• penalties for early termination of a lease, unless the council is reasonably certain not to terminate early.

The right-of-use asset is measured at the amount of the lease liability, adjusted for any prepayments made, plus any direct costs incurred to dismantle and remove the underlying asset or restore the underlying asset on the site on which it is located, less any lease incentive received.

However, for peppercorn, nominal payments or nil consideration leases, the asset is initially measured at fair value.

Subsequent measurement

The right-of-use asset, including peppercorn or nil consideration lease, is subsequently measured using the fair value model. The council considers the cost model to be a reasonable proxy except for:

• assets held under non-commercial leases
• leases where rent reviews do not necessarily reflect market conditions
• leases with terms of more than five years that do not have any provision for rent reviews
• leases where rent reviews will be at periods of more than five years.

For these leases, the asset is carried at a revalued amount. In these financial statements, right-of-use assets held under index-linked leases have been adjusted for changes in the relevant index, while assets held under peppercorn or nil