Our Blogs

WHAT DOES IFRS 16 SAY ABOUT OUR GUARANTEED ENERGY-SAVING SERVICE MODEL?

Energy Drive regularly enters into energy-saving service agreements with clients to provide guaranteed energy-saving solutions. For both us and our clients, it is essential to define what the current business relationship is since trust is paramount when guaranteeing results. In this article, we will take a closer look at how clients can determine whether an Energy Drive service agreement constitutes a lease in terms of IFRS 16.

THE ZERO-CAPEX MODEL

At Energy Drive, we offer Zero-Capex solutions based on VSD technology. These assets save our clients significant energy costs. After installation, the total cost to our client (including the energy savings fee) is less than the energy cost before installation. Energy Drive fully installs the VSDs. Also, the installations are insured and maintained by us. For this reason, ownership of the assets do not pass to our client at any point during the service agreement.

Basically, we create agreements that offer our clients guaranteed minimum Rand savings on their energy costs, which are net of Energy Drive fees. Energy Drive uses our systems as tools to enable energy-saving services to Clients. The assets remain ours throughout this process.
However, the Zero-Capex agreement does seem to resemble a lease in some ways, so let us take a closer look at how these two agreements differ fundamentally.

A LEASE OR NOT?

Energy Drive’s approach is based on the available literature published by the auditing profession (IFRS 16) and the application of guidelines set out in our business model.
To determine whether your energy-saving agreement is a lease, please confirm the appropriate accounting treatment with your respective external audit partner. Obviously, we recommend using proven international accounting standards when doing so. IFRS 16 is particularly useful
when assessing these agreements.

IFRS 16

What follows are the IFRS 16 assessment criteria necessary to determine whether an agreement contains a lease (also see decision tree below).

1. Is there an identified asset?

Note:
If “no” – not a lease.
If “yes” – ask question 2 below.

2. Does the customer have the right to obtain substantially all of the economic benefits from the use of the asset throughout the period of use?

Note:
If “no” – not a lease.
If “yes” – ask question 3 below.

3. Does the customer, the supplier, or neither party have the right to direct how or for what purpose the asset is used throughout the period of use?

Note:
If the supplier has the right – not a lease.
If the customer has the right – ask question 4 below. If neither parties have the right, how and for what purpose the asset will be used is pre-determined – ask question 4 below.

4. Does the customer have the right to operate the asset throughout the period of use, without the supplier having the right to change the operating instructions?

Note:
If “yes” – the agreement is a lease.
If “no” – ask question 5 below.

5. Did the customer design the asset in a way that predetermines how, and for what
purpose, the asset will be used throughout the period of use?

Note:
If “yes” – the agreement is a lease.
If “no” – not a lease

Please see the decision tree, as reflected in IFRS 16 Leases, on the next page.

CONCLUSION

Based on our latest assessment, our contractual relationship with clients does not constitute a lease.

There are many benefits to this business model since our clients are not responsible for the insurance, maintenance and continual improvement of the Energy Drive installation.

The Zero-Capex approach allows our clients to focus on optimising production in their facilities while we focus on saving energy.

At Energy Drive, we wholeheartedly pursue a single vision. We want to revolutionise the way industry uses energy.

Sources: IFRS 16 Unaccompanied Standards (p.32)