Leases and licences

1
Leases and licences

• Partitioning ownership

2
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

3
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

4
Three options

• Partition ownership via two distinct assets,
  originals and copies, premium on operating lease
• Use mobile phone licence conventions
• Two financial asset solution

5
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

6
Criteria for treatment as rent

• Short-term
• Non-transferable
• Detailed stipulations on use
• Lessor has unilateral right to terminate
• Payments over life of contract

7
Treatment as asset

• Licence is an asset separate from spectrum
• Licence held by lessee
• Spectrum always held by lessor, legal owner

8
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..

9
Extend mobile phone treatment?

• Land
• Extraction
• Spectrum

10
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

11
Questions to Canberra Group

• Transferable operating lease
• Mobile phone solution
• Two financial asset solution
• Another
• For

12
Financial lease for less than whole of asset life?

• 10 out of 12 say two asset solution
• 4 of 10 would prefer single loan
• 1 no opinion
• 1 does not think case arises

13
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

14
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

15
Mobile phone?

• 8 say two asset solution
• 2 prefer rent solution
• 1 existing treatment (but would prefer rent)
• no opinion

16
Merge loans?

• Can do exposition clearer with two?

17
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?